Short-run Vs. Long-run Costs

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Presentation transcript:

Short-run Vs. Long-run Costs Ap Micro 10/9

Warm Up Let’s say I want to adjust my fixed inputs – I’m thinking about buying another oven for my bakery. How will this affect my fixed cost? How will this affect my variable cost?

Short-run Vs. Long-run In the short run, fixed cost is completely outside the control of a firm. But all inputs are variable in the long run: This means that in the long run fixed cost may also be varied. In the long run, in other words, a firm’s fixed cost becomes a variable it can choose. The firm will choose its fixed cost in the long run based on the level of output it expects to produce.

Long-run Average Total Cost Curve The long-run average total cost curve (LRATC) shows the relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output. Still U-shaped

LRATC As a manufacturing expands its plant size, ATC may fall (for a time) Eventually, ATC may rise LRATC is in blue

LRATC Points on previous graph indicate where firm should change plant size to attain lowest ATC Per unit costs for a larger plant < per unit cost for current plant The long run ATC is made up of segments of the short-run ATC curves for the various plant sizes that can be constructed The lowest ATC at which any output level can be produced (in the long run) The firm’s planning curve Pic shows LRATC with unlimited plant sizes

Returns to Scale The long-run ATC curve is U-shaped Expanding will not always yield lower costs Assume resource prices are constant Assume that the law of diminishing returns does not apply to production in the long run (remember the definition?)

Economics of Scale AKA increasing returns to scale As plant size increase, a number of factors will for a time lead to lower average costs of production The downward sloping portion of the long-run ATC curve Labor specialization Managerial specialization Efficient capital Other factors (“start-up costs”, advertising, learning by doing)

Diseconomies of Scale AKA decreasing returns to sscale Expansion that leads to higher ATC Upward sloping portion of the long-run ATC Difficulty of efficiently controlling and coordinating a firm’s operations Employee alienation and shirking

Constant Returns to Scale The long-run ATC does not change as the firm expands The “flat” portion of the long-run ATC

Graphs of Returns to Scale

MAKE SURE YOU KNOW ALL OF YOUR COST CURVES!! https://www.youtube.com/watch?v=qYKJdooEnwU

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