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

2. 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?

3. 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.

4. 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

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

6. 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

7. 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?)

8. 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)

9. 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

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

11. Graphs of Returns to Scale

12. MAKE SURE YOU KNOW ALL OF YOUR COST CURVES!!