1. Economies of Scale
Chapter 13 completion

2. Cost Curves for a Typical Firm
Note how MC hits both ATC & AVC at their minimum
Costs
When MC < ATC => average total cost is falling
When MC > ATC => average total cost is rising
$3.00
2.50 MC
ATC
AVC
AFC
ATC is U-shaped
Due to high fixed costs
2.00
1.50
1.00
AFC always declines:
Fixed Costs spread over more output
0.50 2 4 6 8 10 12 14
Quantity of Output

3. Efficient Scale Production
Efficient scale- the quantity of output that minimizes ATC
Production point in long run for all competitive firms
Where MC = ATC
Economic profit = 0

4. Economies of Scale Economies of scale- ATC falls as output increases
Allows for specialization of workers
Leads to more productivity per worker
Diseconomies of scale-
ATC rises as output increases
coordination problems eventually arise as firms grow in size
Constant returns to scale-
ATC stays the same as output increases

5. Short Run vs. Long Run Costs
Costs depends on the time horizon considered
In the short run, some costs are fixed
In the long run, all fixed costs become variable costs
Why: Firms have time to change both plant size & labor force
Therefore, long-run cost curves differ from short-run cost curves

6. Long Run ATC LRATC Average Total Cost Economies of scale Diseconomies
1,200
$12,000
1,000
10,000
Constant
returns to
scale
Quantity of
Cars per Day

7. Long Run ATC LRATC is always below or on short run ATC curve
you can be more efficient in long run!

8. Practice Test