1. AP MICROECONOMICS UNIT #3 Production and Costs
Lecture #3
Costs in the Long-Run

2. COSTS IN THE SHORT-RUN AND IN THE LONG-RUN
Remember – Fixed costs in the short-run are variable costs in the long-run
Long-run cost curves will look different than short- run cost curves
Goal for a firm is to create the optimal plant size

3. LONG-RUN COST CURVES
Long-run ATC curves are made up of segments of short-run
The curve is made up of all points of tangency on an unlimited number of short-run ATC curves
U-shape is caused by economies and diseconomies of large-scale production

4. Figure 7 Average Total Cost in the Short and Long Run
ATC
in short
run with
small factory
ATC
in short
run with
medium factory
ATC
in short
run with
large factory
Cost
$12,000
ATC
in long run
1,200
Quantity of
Cars per Day
Copyright © South-Western

5. ECONOMIES OF SCALE
The downslope is due to economies of mass production
As plant size increases, factors can allow greater production at lower ATC

6. FACTORS CREATING ECONOMIES OF SCALE
Labor specialization produces greater skill and efficiency
Managerial specialization allows supervision of more workers and focus on an area of expertise
Efficient capital promotes modernization and speed
Start-up costs, marketing, advertising

7. DISECONOMIES OF SCALE
Firms can become TOO BIG and start to increase ATC
Upward slope of the curve
Bureaucracy creates inefficiency
More managers needed increases costs
Workers can feel “lost” in a big plant

8. CONSTANT RETURNS TO SCALE
Long-run ATC doesn’t change in some industries
Output stays proportional to increased inputs

9. Figure 7 Average Total Cost in the Short and Long Run
ATC
in short
run with
small factory
ATC
in short
run with
medium factory
ATC
in short
run with
large factory
Cost
ATC
in long run
Economies of
scale
Diseconomies of
scale
1,200
$12,000
1,000
10,000
Constant
returns to
scale
Quantity of
Cars per Day
Copyright © South-Western

10. FIRM SIZE
There is a lowest level of output where a firm can minimize long-run average costs
Called Minimum Efficient Scale (MES)
Depending on industry, both large and small firms can operate
Natural Monopolies occur in industries where small firms cannot achieve MES because economies of scale are so big

11. Long-Run ATC Curve Any number of short-run optimum
Average Total Costs
Output
Any number of short-run optimum
size cost curves can be constructed
8-11

12. Long-Run ATC Curve Long-Run ATC The long-run ATC curve just
Average Total Costs
Output
The long-run ATC curve just
“envelopes” the short run ATCs
8-12

13. Long-run ATC curve where economies
Long-Run ATC Shapes
Economies
Of Scale
Constant Returns
To Scale
Diseconomies
Of Scale
Average Total Costs
Long-Run
ATC q1 q2
Output
Long-run ATC curve where economies
of scale exist
8-13

14. Long-Run ATC Shapes Long-Run ATC
Economies
Of Scale
Diseconomies
Of Scale
Average Total Costs
Long-Run
ATC
Output
Long-run ATC curve where costs are lowest only when large firms are participating
8-14

15. Long-Run ATC Shapes Long-Run ATC Long-run ATC curve where economies
Of Scale
Diseconomies
Of Scale
Long-Run
ATC
Average Total Costs
Output
Long-run ATC curve where economies
of scale exist, are exhausted quickly,
and turn back up substantially
8-15