Long Run Costs

Long Run Costs

• Short Run - At least one input is fixed. If they don't mention then assume capital (machinery/factory) is fixed.
• Long Run - All inputs are variable (firms can get more labor and capital). Technological level is fixed.
• Very Long Run - all inputs are variable and technological improvements can occur.

• Economies of Scale - When average total cost (ATC) decreases. This is a good thing! In the graph above, this occurs from an output of

  0

  ---

  to

  100

  ---

  . Example: When Walmart buys can of Pepsi from its suppliers in bulk they get good deals (low cost per can).
• Diseconomies of Scale - When ATC increases. This is a bad thing! In the graph above, this occurs from an output of

  100

  ---

  to

  200

  ---

  . Example: If Walmart buys too many supplies (like cans of Pepsi) they might need to buy more storage space or need more workers which can lead to inefficiency and higher costs.
• Minimum Efficiency Scale - the lowest point of the Long Run ATC curve. In the graph above, this is at an output of

  100

  ---

  .
• Factor Costs - these are input costs (like wages) needed to produce the product. If factor costs decrease, the entire short run and long run cost curves would shift

  down

  ---

Returns to Scale

• Increasing Returns to Scale - when inputs are doubled and output more than doubles. In the graph above, this occurs from an output of

  0

  ---

  to

  100

  ---

  .
• Decreasing Returns to Scale - when inputs are doubled and output less than doubles. In the graph above, this occurs from an output of

  100

  ---

  to

  200

  ---

  .
• Constant Return to Scale - when inputs are doubled and output exactly doubles. In the graph above, this occurs at an output of

  100

  ---

  .