Transcript The Long Run Average Total Cost Curve

Long Run
Average Total Cost Curve
The Long Run Average Total Cost
Curve
• When studying cost curves, remember that we
have been in the short run.
• In the short run, the average total cost curve has
been u-shaped.
What is the shape of the Long
Run Average Total Cost Curve?
Long Run
Average Total Cost Curve
• The long run average total cost curve is
made up of a series of short run ATC’S.
Each ATC is for a different time period, and
represents the average total costs at that
point in time, for those outputs.
Long Run
Average Total Cost Curve
• Studies have shown that the minimum point
of the short run ATC’S first falls, and then
rises.
Graphing The Long Run Average
Total Cost Curve
• When we graph the long run ATC, we graph the
minimum point of all of the various short run
ATC’S.
Graphing The Long Run Average
Total Cost Curve
• The long run average total cost curve turns out to
be u-shaped.
Shape Of The Long Run Average
Total Cost Curve
• Why is the long run average total cost curve
initially downwards sloping?
• Economies of Scale explain the falling costs.
Causes of Economies of Scale
Causes of Economies of Scale
1
Labor Specialization
2
Management Specialization
3
Efficient Use of Capital
4
Efficient Use of By-Products
Labor Specialization
A: With more workers, firms can subdivide the
work. Workers can become more efficient and
faster at their job.
Management Specialization
B: With more managers, the firm can subdivide the
work of management, into specialized jobs.
Each job can then be done more efficiently.
Many Technologies work most
efficiently (cheaply) in larger
production batches.
Efficient Capital Use
C: Many Technologies work most efficiently
(cheaply) in larger production batches.
Efficient Use of By-Products
D: Firms cut costs by using all of the raw materials
that they purchase by find new products.
Causes of Diseconomies of Scale
Diseconomies of Scale
• Why does the long run average total cost curve
becomes upwards sloping?
• Diseconomies of Scale explains the rising costs.
Causes of Diseconomies of Scale
1
Worker Alienation
2
Communication Problems
3
Coordination and Control Problems
Worker Alienation
A:
- Large numbers of unhappy workers require
ever larger numbers of supervisors, who do not
directly produce, but must be paid.
Communication Problems
B:- In all firms, information is lost or distorted as it
is passed up and down in large bureaucracies.
Coordination and Control
C:
- Control and coordination is hard to maintain
in large bureaucracies.
Diseconomies of Scale
For all of these reasons, companies that become too
large experience diseconomies of scale.
Long Run
Average Total Cost Curves
History tells us that companies become more
efficient as they become larger, but that if they get
too large, they become inefficient.
What will happen to all of these companies that have
recently merged?.