Econ 2 Files
Econ 2 Lecture
Notes
Lecture 17: Costs in the Long Run
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Economics 2 |
Lecture 17: Costs in the Long Run
long run costs
scale economies
Long Run Costs
In the short run the level of at least one of the firm's inputs is fixed in quantity. In the long tun the levels of all resources are variable.
Assume that the fixed factor is plant or factory size. For each plant size, there is a corresponding short-run average cost curve.
Consider the publisher of a small newspaper. In the short-run, the firm can choose only the number of typesetters, printers, paper, and ink it uses. But, in the long-run, assume that it can also choose between two different sizes of printing presses.
Each size printing press has a different short-run average cost curve: SL for the small printing press and BG for the big printing press. Circulation is currently 20,000. If the firm chooses the smaller printing press, its average cost curve will be SL. Suppose circulation grows to 50,000, it's costs will be 15 cents a copy (point Y). The firm may wish that it had purchased the bigger press, which would have enabled it to cut average costs to 7 cents (point Z). However, in the short-run nothing can be done about this decision; the AC curve remains SL.
In the long run, the machine must be replaced and management has its choice again. If it expects a circulation of 50,000 copies, it will purchase the larger press and average costs will be 7 cents a copy. If it expects a circulation of only 20,000 copies, it will use the smaller press and average costs will be 9 cents. In the long run, the firm will select the plant size (the short-run AC curve) that is most economical for the output level it expects to produce.
| The long-run average cost curve consists of all the lower segments of the short-run average cost curves: SEZ. |  |
Scale Economies
- Economies of Scale
- average costs fall as output increases
- diseconomies of scale
- average costs increase as output increases
- constant returns to scale
- costant average costs as output increases
- minimum efficient scale
- least cost level of production; it is the lowest point on the long-run average cost curve
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