1. Recall:  Long Run: period in which quantities of all resources used in an industry can be adjusted.  Thus, inputs that were fixed in the short term (e.g. machinery, buildings, cultivated land) can be adjusted in the long run  Since all inputs can be varied, the law of diminishing marginal returns no longer applies 4.4 Production & Costs in the Long Run

2.  Increasing Returns to Scale:  A situation in which a percentage increase in all inputs causes a larger percentage increase in output  Three basic causes for this:  Division of Labour  Specialized Capital  Specialized Management Increasing Returns to Scale aka Economies of Scale

3.  Division of Labour  Performing fewer tasks allows workers to become more efficient at their jobs  Specialized Capital  Specialized machinery, such as in car manufacturing, will have more specialized function so that it performs fewer tasks more efficiently  Specialized Management  Along with an enlarged scale of production, more managers hired to specific areas of expertise implies more efficient performance Increasing Returns to Scale aka Economies of Scale

4.  Constant Returns to Scale:  A situation in which a percentage increase in all inputs results in an equal percentage increase in output  Decreasing Returns to Scale:  aka “Diseconomies of Scale”  A situation in which a percentage increase in all inputs causes a smaller percentage increase in output; 2 major reasons for this:  Management Difficulties  Limited Natural Resources Constant & Decreasing Returns to Scale

5.  Management Difficulties  Continuing to expand scale of production will eventually make managers face coordinating problems because the scale is too large  Limited Natural Resources  In primary industries (fishing, forestry), there may only be a limited supply of easily available natural resources Decreasing Returns to Scale aka Diseconomies of Scale

6.  The first 1/3 of the Long Run AC Curve has a negative slope – increasing returns to scale  The second 1/3 is horizontal, so a constant cost per unit  The third 1/3 has a positive slope – decreasing returns to scale Returns to Scale and Long-Run Costs