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

2. 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

3. 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!”

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

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

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

7. Economies in action

8. 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

9. 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

10. Costs in the Long run Long-run average costs shape of the LRAC curve11

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

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

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

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

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

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

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

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

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

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

21. 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

22. Test your knowledge
Are you a donkey or an elephant?