Module
Micro: 20
Econ: 56
Long Run Costs
KRUGMAN'S
MICROECONOMICS for AP*
Margaret Ray and David Anderson
What you will learn
in this Module:
• Why a firm’s costs differ in the short run
versus the long run.
• How a firm can enjoy economies of
scale.
Returns to Scale
The long-run average
cost curve for a firm is
“U- shaped” like the
short-run average
cost curves – but for
a different reason.
Short-run versus Long-run Costs
• The short run: at least one input is fixed (can not
be changed)
• The long-run: all inputs are variable
Economies and Diseconomies of Scale
• Economies of Scale: the LRATC is falling as the
firm expands.
• Diseconomies of Scale: the LRATC is rising as
the firm expands.
Sunk Costs
• A sunk cost is a cost that has been incurred in
the past and cannot be recovered.
• Sunk costs don’t matter in decision-making!
Figure 56.1 Choosing the Level of Fixed Cost for Selena’s Gourmet Salsas
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Figure 56.2 Short-Run and Long-Run Average Total Cost Curves
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Table 56.1 Concepts and Measures of Cost
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers