Long run cost of production? Flashcards
What are economies of scale?
unit cost advantages from expanding the scale of production in the long run, reducing average costs over a range of output
What is constant returns to scale?
When LRAC remains constant as output increases because output is rising in proportion to inputs used
What is diseconomies of scale?
business may expand beyond optimal size and see rising LRAC
What are economies of scope?
cheaper to produce a range of products - cost savings from product diversification
what is minimum effecient scale?
where internal economies of scale have been fully exploited, corresponds to lowest point on firms LRAC curve
6 internal economies of scale?
- technical
- managerial
- risk bearing
- purchasing
- financial
- network
in the long run all costs are assumed to be …. meaning that scale of production …
variable, can change
What do economies of scale arise from?
increasing returns to scale in the long run
Examples of industries with low MES?
- hairdressers
- coffee shops
- pubs
Examples of industries with high MES?
- tube
- water companies
What is the LRAC curve also known as ?
- envelope curve
What is the LRAC curve drawn on the assumption of?
there being an infinate number of plant sizes
If LRAS is falling when output is increasing then the firm is experiancing …
economies of scale
Evalutation for the LRAC curve and economies of scale?
- not all industries have U shaped LRaC curve, some industries will experiance MES at low level of output
- some industries will not have any significant economies of scale (horizontal LRAC curve)
- some industries wont experiance diseconomies of scale
- all businesses can exploit EOS
Effect of internal economies of scale on the LRAC curve?
movement down the curve
