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Long-Run Production Costs Everything is Variable
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Resource Adjustments In the Long-Run, a firm can undergo any adjustments to its resource inputs. Unlike the Short-Run, there are no fixed resources. It can alter its plant capacity, change industries, and ultimately adapt to differing market conditions.
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Firm Size and Costs Since we can change the size of our plant in the Long-Run, we have options A, B, or C. D is the Long-Run Average Total Cost Curve. It is made up of a series of Short-Run Curves.
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The Long-Run Cost Curve At the minimum of curve A and curve C, the firm should shift production to a new plant size. A different plant size is more efficient for different output quantities. Why?
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Figure 8-8 Quiz Figure 8-8 on page 204 illustrates an excellent example of a firm’s Long-Run Average Total Cost Curve. It consists of an unlimited number of plant sizes, which might be appropriate depending on the firms desired level of output.
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Economies of Scale Economies of Scale explain the down sloping part of the Long-Run ATC Curve. As the firm expands the size of its plants and its total output in the long-run, it begins to experience the economies of mass production. You begin to use capital more efficiently, specialize, share managerial resources, etc.
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Factors of Economies of Scale Labour Specialization: Working on the same thing can make people more proficient. Managerial Specialization: Managers and supervisors can be utilized more efficiently. Efficient Capital: If a robot can produce 200,000 cars per year, 0-199,999 units is not as efficient. Other Factors: Research & development costs, advertising, financing, et. Cetera can be spread out.
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Diseconomies of Scale Increases in the ATC of producing a product as the firm expands in the long-run and becomes too large. Main factor is difficulty controlling and coordinating a firm’s operations. Communication problems, middle management, bureaucracy, apathetic employees, slow to change. Think of problems you might see at a really large chain store.
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Constant Returns to Scale This is when long-run average costs are not changing. It is the output range between economies of scale (declining ATC) and diseconomies of scale (increasing ATC).
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Minimum Efficient Scale The lowest level of output at which a firm can minimize long-run average costs. Capital intensive industries realize minimum efficient scales at very high levels of output. A Natural Monopoly exists in an industry when the economies of scale are so great that one producer would be the most efficient.
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Economies and Diseconomies of Scale Utilize today’s reading and answer the associated questions. To be handed in tomorrow (Assignment # 10) The information will be on Wednesday’s Ch. 7 & 8 Test.
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