7. Production, Costs & Revenue - Returns to Scale Flashcards
What is the difference between the long run and short run?
In the long run we assume that all factors of production are variable whereas in the short run at least one is fixed
What can occur in the long run which can’t occur in the short run and how does that happen?
In the long run a firm can increase the scale of its production this happens when they increase the factors of production
What does the long run average cost curve consist of?
The long run average cost curve is made up of several different short run average cost curve. When you connect all the different short run positions you find the long run cost curve
What is the shape of the long run average cost curve and why?
LRAC curve is U-shaped this is because of the influence of increasing returns to scale constant returns to scale and decreasing returns to scale.
What are increasing returns to scale and how do they influence the LRAC curve?
Increasing returns to scale occur when a company increases its levels of factors of production which gives a consequential greater percentage increase in output. % change in output > % change in inputThey cause the initial downward slope of the LRAC curve
What are constant returns to scale how do they influence the LRAC curve?
Constant returns to scale occurs when a company increases practice of production and finds that output increases by exactly the same percentage.% change in output = % change in inputThis affects the flat middle portion of the curve
What are decreasing returns to scale and how do they influence the LRAC curve?
Decreasing returns to scale occur when a firm increases its factors of production but finds out but increases by smaller percentage than the change in factors of production.% change in output < % change in input
What causes firms to experience increasing returns to scale or decreasing returns to scale?
If a firm benefit from economies of scale they will experience increasing returns to scale where as firms that suffer from diseconomies of scale will experience decreasing returns to scale.
Where is the minimum efficient scale point on the long run average cost curve and what is it?
The minimum efficiency scale point is the first point on the long run average cost curve at which the curve stops falling. This is the minimum amount of output a firm needs to produce to fully exploit economies of scale.
What is the alternative shape for the long run average cost curve and why?
The long run average cost curve may also be drawn in the bucket diagram, this is when the bottom of the curve flattens out for longer than the u-shaped curve. This is because firms don’t immediately start suffering from diseconomies of scale as soon as they’ve stopped benefiting from economies of scale, firms can benefit from economies of scale over a wider range of output - slightly more realistic.
