3.3

Question 1

Long-Run Production Costs

Answer 1

• The firm can change all input amounts, including
  plant size
• All costs are considered variable in the long run
• Long run ATC
• Now consider costs in terms of average total
  costs
• ATC curve is U shaped due to economies of
  scale followed by diseconomies of scale.
• Also referred to as “planning curve”

Question 2

Economies of Scale

Answer 2

Otherwise known as economies of mass production.
* Explains the down sloping part of the ATC curve.
* As plant sizes increase, a number of factors will lead
to a lower than average cost of production (for a
time).
* These factors are:
* Labor & managerial specialization, Efficient
capital, “learning by doing”
* ATC decreases as output increases
* When experiencing economies of scale, a 10%
increase will cause a greater increase in output of
20%

Question 3

Diseconomies of Scale

Answer 3

Takes place when there is an increase in the ATC of producing
a product as the firm expands the size of its plant in the LR.
* ATC increases as output increases
* Main cause is difficulty controlling/coordinating a firm’s
operations as it expands.
* Smaller firms easier to stay in touch of operations, larger ones
have more issues.
* Ex: lack of communication, many managers, workers feeling alienated.
* May require extra workers to act as supervisors which will
increase costs.
* Increase in inputs does not mean equal increase in output.
* Ex: 10% increase in inputs results in 5% increase in output.

Question 4

Constant Returns to Scale

Answer 4

In this range the ATC is constant as output increases
* MES- Minimum efficient scale- the lowest level of
output at which a firm can minimize Long Run
average costs.
* Only achieved by few large scale producers.
* Small firms can’t realize MES and can’t compete.
* In extreme cases, it might result in natural monopoly
* Natural monopoly is a rare market situation where
ATC is minimized only when one firm produces the
particular G/S.

Question 5

Returns to Scale

Answer 5

Increasing Returns to Scale
* Output is increasing at a faster rate than all inputs
Decreasing Returns of Scale
* Output is increasing at a slower rate than all
inputs
Constant Returns to Scale
* Output is increasing at the same rate as all inputs

Question 6

Why do economies of scale occur?

Answer 6

Firms that produce more can better use Mass
Production Techniques and Specialization.

Ex. Using mass production techniques, like robots, will cause total cost to be higher but the average cost for each car would be significantly lower.