1. Long-run costs

2. Firms in the long run can make all the resource adjustment they desire. √ If the number of possible plant sizes is large, the long-run ATC creates a smooth curve. √ As these changes are made, ATC changes and the set of possible plant sizes produces varying sets of short run cost curves.

3. Alternative long-run average cost curves (a) Economies of scale Output O Costs LRAC As plant size increases a number of factors will lead, for a time, to average costs declining. Labor specialization, managerial specialization, efficient capital and certain other kinds of cost like “start-up” and advertising reduce AC. Labor specialization, managerial specialization, efficient capital and certain other kinds of cost like “start-up” and advertising reduce AC.

4. Output O Costs LRAC (b) Diseconomies of scale Alternative long-run average cost curves √ As quantity grows larger, costs may rise due to the difficulty of efficiently controlling a firm’s operations as it becomes a large-scale producer. Bureaucracy and red tape and causes AC to rise.

5. Output O Costs LRAC (c) Constant costs Alternative long-run average cost curves √ Constant Returns to Scale—long run-costs do not change over the range of output

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

7. Output O Costs A typical long-run average cost curveLRAC Economies of scale Constant costs Diseconomies of scale

8. Relationship between short-run and long-run AC curves Relationship between short-run and long-run AC curves

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

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

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

12. Output O Costs LRAC Extensive economies of scale exist

13. Output O Costs LRAC Economiesof scale are quickly exhausted

14. Output O Costs LRAC Economies of scale are constant over large range of output