Long-Run Costs* IB-HL Economics Mr. Messere – BBB 4M7 Victoria Park C.I. *This is for all the lazy IB-HL students who are late &/or too exasperated to.

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Long-Run Costs* IB-HL Economics Mr. Messere – BBB 4M7 Victoria Park C.I. *This is for all the lazy IB-HL students who are late &/or too exasperated to take notes in class. I should get paid extra $$$ for this eh? Enjoy!

Long-Run Average Cost Long-run average cost refers to the minimum short-run average cost at each possible level of output The firm will choose the plant size that minimizes cost for any desired output level –The firm’s LRAC is tangent to the infinite number of short-run average cost curves – for this reason the LRAC curve is sometimes called the envelope curve

Long-Run Average Cost

LRAC and Returns to Scale Three possible results: Increasing returns to scale (Range A) Constant returns to scale (Range B) Decreasing Returns to scale (Range C)

LRAC and Returns to Scale –Increasing Returns to Scale / Economies of Scale (falls in the initial output Range A between AC1 and AC2) – situation in which a percentage increase in all inputs causes a larger percentage increase in output (eg. assembly-line manufacturing); caused by: Specialization of labour Specialized capital Specialized management

LRAC and Returns to Scale –Constant Returns to Scale (occurs in Range B between AC2 and AC3)– situation in which a percentage increase in all inputs results in an equal percentage increase in output (eg. craft industries, manufacturing) –Decreasing Returns to Scale (occurs in range C beyond AC3) – situation in which a percentage increase in all inputs leads to a smaller percentage decrease in output (eg. primary industries); caused by: management difficulties limited natural resources

Minimum Efficient Scale (MES) –(MES) is the output for a business in the long run where the internal economies of scale have been fully exploited. –It corresponds to the lowest point on the long run average total cost curve (aka ‘output of long run productive efficiency’) –MES is rarely a single output - more likely it is a range of output levels where average cost is minimized where the firm achieves constant returns to scale. –MES varies from industry to industry depending on the nature of the cost structure in a particular sector of the economy.

Minimum Efficient Scale (MES) (MES) is useful in determining the likely market structure of a market. i.e. if minimum efficient scale small relative to the overall size of the market (demand for the good), there will be a large number of firms as in perfect competition Practice