Long run average cost and returns to scale

Question 1

What does the long run mean ?

Answer 1

When all factors of production are variable

Question 2

What does returns to scale mean ?

Answer 2

How a firms output changes when all its factor inputs are increased proportionally

Question 3

Draw out the Long run average cost diagram ?

Question 4

Explain what the 1st part of the LRAC diagram shows / means

Answer 4

LRAC falls as there is an increase in the returns to scale - this is also where economies of scale are achieved because costs are lower

Question 5

Explain what the 2nd part of the LRAC diagram shows / means

Answer 5

There is a constant return to scale , which means that there is no change in the LRAC for the business

Question 6

Explain the 3rd part of the LRAC diagram

Answer 6

There is decreasing returns to scale which causes LRAC to increase as diseconomies of scale are achieved

%change of output is less than the % of input

Question 7

Explain what is meant by Minimum efficient scale ( MES )

Answer 7

It is the lowest amount of input to exploit full economies of scale

Found at the end of the 1st part of the diagram , just as constant returns to scale is achieved