Important to note the differences from the short run Costs in the Long Run Important to note the differences from the short run

Production in the Long run All factors of production are variable in the long run The scale of production: returns to scale - output/input ratio constant returns to scale - output/input is constant increasing returns to scale - output/input is rising decreasing returns to scale output/input is falling 4

Economies of scale “Economies of scale exist when the expansion of a firm or industry allows the product to be produced at a lower unit cost … Economies of scale are only possible if there is sufficient demand for the product, eg we would hardly expect to find economies in the production of artificial limbs, because there are simply not enough demanded!”

Internal economies of scale Come about from the growth of the firm regardless of what is happening to other firms

Types of internal economies Technical Marketing/commercial Purchasing Financial/Risk-bearing Organisational/Human see notes page 5

Production in the Long run Economies of scale - technical specialisation & division of labour indivisibilities principle of multiples container principle 5

Economies in action

External economies of scale Economies of concentration – specialist suppliers Economies of information – industries share research Economies of disintegration – large firms employ smaller firms to carry out processes

Production in the Long run Diseconomies of scale Internal communication Management Higher labour costs – overmanning/overtime Diseconomies of scale External Shortage of skilled labour and high wage costs Shortage of raw materials Congestion High rents and property costs 5

Costs in the Long run Long-run average costs shape of the LRAC curve 11

Alternative long-run average cost curves Costs LRAC O Output (a) Economies of scale

Alternative long-run average cost curves LRAC Costs O Output (b) Diseconomies of scale

Alternative long-run average cost curves Costs LRAC O Output (c) Constant costs

A typical long-run average cost curve LRAC Costs O Output

A typical long-run average cost curve Economies of scale Constant costs Diseconomies of scale LRAC Costs O Output

Deriving long-run average cost curves: factories of fixed size SRAC1 Costs 1 factory O Output

Deriving long-run average cost curves: factories of fixed size SRAC1 SRAC2 Costs 2 factories O Output

Deriving long-run average cost curves: factories of fixed size SRAC1 SRAC3 SRAC2 Costs 3 factories O Output

Deriving long-run average cost curves: factories of fixed size SRAC5 SRAC1 SRAC4 SRAC3 SRAC2 5 factories Costs 4 factories O Output

Deriving a long-run average cost curve: choice of factory size LRAC Costs O Output

Costs A common topic in the exams! Know the difference between increasing/diminishing returns and economies of scale Difference between short run and long run

Test your knowledge Are you a donkey or an elephant?