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LONG-RUN COST OF

PRODUCTION

LONG-RUN COST CURVE


In the longrun, all factors of production are variable, and hence, all costs
are variable.
Long-run ATC curve for the enterprise is made up of segments of the
short-run ATC curves
The long-run ATC curve shows the lowest average total cost at which any
output level can be produced after the firm has had time to make all
appropriate adjustments in its plant size.

The long-run averagetotal-cost curve is made


up of segments of the
short-run cost curves
(ATC-1, ATC-2, etc.) of
the various-size plants
from which the firm
might
choose.
Each
point on the bumpy
planning curve shows
the lowest unit cost
attainable
for
any
output when the firm
has
had time to make all
desired changes in its
plant size.

If
the
number
of
possible plant sizes is
very large, the longrun average-total cost
curve approximates a
smooth
curve.
Economies of scale,
followed
by
diseconomies of scale,
cause the curve to be
U-shaped.

ECONOMIES OF SCALE
Economies of scale are rather
rapidly obtained as plant size
rises, and diseconomies of scale
are not
encountered until a considerably
large scale of output has been
achieved. Thus, long-run average
total cost is constant over a wide
range of output.

Economies of scale, or economies of mass production, explain the


downsloping part of the long-run ATC curve.
As plant size increases, a number of factors will for a time lead to lower
average costs of production:
Labor Specialization- greater efficiency and eliminates loss of time
Managerial Specialization- greater productivity and efficiency
Efficient Capital- effective use of the equipment demands a high
volume of production

DISECONOMIES OF SCALE
Economies of scale are exhausted
quickly, followed immediately by
diseconomies of scale. Minimum
ATC thus occurs at a relatively
low output.

The main factor causing diseconomies of scale is the difficulty of


efficiently controlling and coordinating a firms operations as it becomes a
large-scale producer.
Single key executive cannot assemble, digest, and understand all the
information essential to decision making on a large scale, thus needs
delegation of authority.
expansion of the management hierarchy leads to problems of
communication and cooperation, bureaucratic red tape, and the
possibility that decisions will not be coordinated.
Workers may feel alienated from their employers and care little about
working efficiently.

MINIMUM EFFICIENT SCALE AND


INDUSTRY STRUCTURE
Minimum efficient scale (MES): the lowest level of output at which a
firm can minimize long-run average costs.
MES
MES
The shape of the long-run averagetotal-cost curve is determined by
technology and the economies and
diseconomies
of scale that result. The shape of the
long-run ATC curve, in turn, can be
significant in determining whether
an industry is populated by a relatively
large number of small firms or is
dominated by a few large producers, or
lies somewhere in between.