Long Run Cost Curves
In the long run




A small plant that manufactures chairs will
have its own short run cost curve
If a firm expands and replaces its small plant
with a medium size plant, it’ll move from one
short run curve to another
There is a different short run cost curve for
each given quantity of fixed factor
At first, each additional plant will only lower
the overall long term ATC
2
Short Run
Long Run
•Firms can only vary
employment and material to
increase output
•Firm can expand or build
another factory to increase
output
3
Costs in the Long Run (b)
Figure 4.8, page 99
Long-Run Average Costs
ATC in short run with
small factory
ATC in short run with
large factory
ATC in short run with
medium factory
AC4
$ per Magazine
AC1
AC2
Range A
Long-Run AC
AC3
Range B
Range C
Quantity of Magazines per Week
4
Why might the AC cost curves move
downwards between AC1 and AC2
(from previous slide)
Example:
Suppose, for example, that Company X employs
1,000 workers in a 5,000 square foot factory to
produce 1 million Stuffed Amigos
The company then expands to a 10,000 square
foot factory employing 2,000 workers producing
2 million Stuffed Amigos.
Why might going from AC1 to AC 2 result in a
lower production cost per unit?
Note: The law of marginal diminishing return does
not apply in the long run because the fixed input
is no longer fixed in the long term
Costs in the Long Run (a)


Long-run average cost is the minimum
short-run average cost at every output
The long-run average cost curve is
saucer-shaped because of various
ranges of returns to scale



initial range of increasing returns to scale
middle range of constant returns to scale
final range of decreasing returns to scale
7
Costs in the Long Run (b)
Figure 4.8, page 99
Long-Run Average Costs
ATC in short run with
small factory
ATC in short run with
large factory
ATC in short run with
medium factory
AC4
$ per Magazine
AC1
AC2
Range A
Long-Run AC
AC3
Range B
Range C
Quantity of Magazines per Week
8
T 4, Returns to Scale (a)

All inputs can be changed by the same
proportion in the long run
 increasing returns to scale means the %
change in output > the % change in
inputs
 constant returns to scale means the %
change in output = the % change in
inputs
 decreasing returns to scale means the %
change in output < the % change in
inputs
9
Economies of Scale



Economies of scale is also another
term that refers to the same thing
Increasing returns to scale =
Economies of scale
Decreasing returns to scale =
Diseconomies of scale
10
Returns to Scale (b)

Increasing returns to scale are caused by
 the division of labor
 working on fewer tasks allow workers to
become proficient
 specialized management
 Managers can focus on developing and
managing own department
 Specialized Capital
 Some machinery is only available to larger
plants and is designed to produce mass
number of units
11
Returns to Scale (b)
• Decreasing returns to scale are caused by
• management difficulties
• Having too many departments will result in
coordination and communication issues
• limited natural resources
• More applicable to fishing and forestry industries
where such natural resources are limited, even in the
long run
• The long run ATC curve shows the lowest
average total cost at which any output level can
be produced after the firm has had time to
adjust its plant size
• In real life, there can be unlimited number of
short run ATC curves. Therefore the long run
ATC curve is much smoother.