Chapter 9 - Long-Run Costs and Output Decisions Flashcards
breaking even
The situation in which a firm is earning exactly a normal rate of return.
shutdown point
The lowest point on the average variable
cost curve. When price falls below the minimum point on AVC, total revenue is insufficient to cover variable costs and the firm will shut down and bear losses equal to fixed costs.
short-run industry supply curve
The sum of the marginal cost curves (above AVC) of all the firms in an industry.
increasing returns to scale, or economies of scale
An increase in a firm’s scale of production leads to lower costs per unit produced
constant returns to scale
An increase in a firm’s scale of production has no effect on costs per unit produced.
decreasing returns to scale, or diseconomies of scale
An increase in a firm’s scale of production leads to higher costs per unit produced.
long-run average cost curve (LRAC)
The “envelope” of a series of short-run cost curves.
minimum efficient scale (MES)
The smallest size at which the long-run average cost curve is at its minimum.
optimal scale of plant
The scale of plant that minimizes average cost.
long-run competitive equilibrium
When P = SRMC = SRAC = LRAC and profits are zero.
external economies and diseconomies
When industry growth results in a decrease of long-run average costs, there are external economies; when industry growth results in an increase of long-run average costs, there are external diseconomies.
long-run industry supply curve (LRIS)
A graph that traces out price and total output over time as an industry expands.
increasing-cost industry
An industry that encounters external diseconomies—that is, average costs increase as the industry grows. The long-run supply curve for such an industry has a positive slope.
constant-cost industry
An industry that shows no economies or diseconomies of scale as the industry grows. Such industries have flat, or horizontal, long-run supply curves.
decreasing-cost industry
An industry that realizes external economies—that is, average costs decrease as the industry grows. The long-run supply curve for such an industry has a negative slope.
