measuring economies of scale in long run, Microeconomics

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Economies and Diseconomies of Scale

-Economies of Scale

  • Increase in the output is greater than increase in the inputs.

-Diseconomies of Scale

  • Increase in the output is less than increase in the inputs.

Measuring Economies of Scale

2373_economies of scale.png

Thus, the following is true:

-EC< 1: MC < AC

  • Average cost shows decreasing economies of scale

-EC = 1: MC = AC

  • Average cost shows constant economies of scale

-EC > 1: MC > AC

  • Average cost shows increasing economies of scale

The Relationship between Short Run and Long Run Cost

-We will use long and short run cost to determine optimal plant size

Long-Run Cost with the Constant Returns to Scale

1609_long run curve.png

Observation

-The optimal plant size depends on the anticipated output (for example Q1 choose SAC1,etc).

-The long run average cost curve is the envelope of the firm's short run average cost curves.

Question

-What would happen to the average cost if an output level other than that shown is selected?
Long Run Cost(LRC) with Economies and Diseconomies of Scale
31_long run cost.png

What is firms' long run cost curve?

-Firms can change scale to change output in the long-run.

-The long run cost curve is dark blue portion of SAC curve which represents minimum cost for any level of output.

Observations

-The LAC doesn't include minimum points of small and large size plants? Why not?

-LMC is not envelope of short run marginal cost. Why not?

Measuring Economies of Scale
746_economies of scale1.png

*  Thus, the following is true:

- EC< 1: MC < AC

  • Average cost signifies decreasing economies of scale

- EC = 1: MC = AC

  • Average cost signifies constant economies of scale

- EC > 1: MC > AC

  • Average cost signifies increasing economies of scale

*  The Relationship Between Short Run and Long Run Cost

- We will use long and short run cost to determine optimal plant size
Long Run Cost with the Constant Returns to Scale

1392_long run cost1.png

* Observation

- The optimal plant size depends on the anticipated output (for example Q1 choose SAC1,etc).

- The long run average cost curve is the envelope of the firm's short run average cost curves.

*  Question

- What would happen to the average cost if an output level other than that shown is selected?

Long Run Cost (LRC) with Economies and Diseconomies of Scale

935_long run cost2.png


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