1. Topics Covered: Production in the LR Costs in the LR LRAC curves LRMC Curves The relationship between SRAC and LRAC curves

2. Production in the Long run All factors variable in long runAll factors variable in long run The scale of production:The scale of production: –constant returns to scale –increasing returns to scale –decreasing returns to scale

3. Economies of scaleEconomies of scale –specialisation & division of labour –indivisibilities –container principle –greater efficiency of large machines –by-products –multi-stage production –organisational & administrative economies –financial economies Diseconomies of scaleDiseconomies of scale Production in the Long run

4. External economies and diseconomies of scaleExternal economies and diseconomies of scale LocationLocation –balancing the distance from suppliers and consumers –importance of transport costs Optimum combination of factors MPPa/Pa = MPPb/Pb... = MPPn/PnOptimum combination of factors MPPa/Pa = MPPb/Pb... = MPPn/Pn Decision making in different time periodsDecision making in different time periods –very short run, short run, long run and very long run –decisions can be made for all time periods at the same time Production in the Long run

5. Costs in the Long run Long-run average costsLong-run average costs –shape of the LRAC curve –assumptions behind the curve

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

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

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

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

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

11. Costs in the Long run Long-run average costsLong-run average costs –shape of the LRAC curve –assumptions behind the curve Long-run marginal costsLong-run marginal costs

12. Long-run average and marginal costs Output O Costs (a) Economies of scale LRAC LRMC

13. Output O Costs (b) Diseconomies of scale LRAC LRMC Long-run average and marginal costs

14. Output O Costs (c) Constant costs LRAC = LRMC Long-run average and marginal costs

15. Output O Costs (d) Initial economies of scale, then diseconomies of scale LRMC LRAC Long-run average and marginal costs

16. Costs in the Long run Long-run average costsLong-run average costs –shape of the LRAC curve –assumptions behind the curve Long-run marginal costsLong-run marginal costs Relationship between long-run and short- run average costsRelationship between long-run and short- run average costs –the envelope curve

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

18. Deriving long-run average cost curves: factories of fixed size SRAC 1 SRAC 2 Costs Output O 2 factories

19. Deriving long-run average cost curves: factories of fixed size SRAC 1 SRAC 3 SRAC 2 Costs Output O 3 factories

20. Deriving long-run average cost curves: factories of fixed size SRAC 1 SRAC 3 SRAC 2 SRAC 4 SRAC 5 Costs Output O 5 factories 4 factories

21. Deriving long-run average cost curves: factories of fixed size SRAC 1 SRAC 3 SRAC 2 SRAC 4 SRAC 5 LRAC Costs Output O

22. Deriving a long-run average cost curve: choice of factory size Costs Output O Examples of short-run average cost curves

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

24. Costs in the Long run Long-run average costsLong-run average costs –shape of the LRAC curve –assumptions behind the curve Long-run marginal costsLong-run marginal costs Relationship between long-run and short- run average costsRelationship between long-run and short- run average costs –the envelope curve Long-run cost curves in practiceLong-run cost curves in practice

25. Costs in the Long run Long-run average costsLong-run average costs –shape of the LRAC curve –assumptions behind the curve Long-run marginal costsLong-run marginal costs Relationship between long-run and short- run average costsRelationship between long-run and short- run average costs –the envelope curve Long-run cost curves in practiceLong-run cost curves in practice –the evidence

26. Costs in the Long run Long-run average costsLong-run average costs –shape of the LRAC curve –assumptions behind the curve Long-run marginal costsLong-run marginal costs Relationship between long-run and short- run average costsRelationship between long-run and short- run average costs –the envelope curve Long-run cost curves in practiceLong-run cost curves in practice –the evidence –minimum efficient plant size