Production Choices and Costs: The Long Run
Read this section to learn about the behavior of the producer in the long run. Take a moment to read through the stated learning outcomes for this chapter of the text, which you can find at the beginning of each section. These outcomes should be your goals as you read through the chapter. Attempt the "Try It" problems at the end of the section before checking your answers.
Costs in the Long Run
The Size Distribution of Firms
Economies and diseconomies of scale have a powerful effect on the sizes of firms that will operate in any market. Suppose firms in a particular industry experience diseconomies of scale at relatively low levels of output. That industry will be characterized by a large number of fairly small firms. The restaurant market appears to be such an industry. Barbers and beauticians are another example.
If firms in an industry experience economies of scale over a very wide range of output, firms that expand to take advantage of lower cost will force out smaller firms that have higher costs. Such industries are likely to have a few large firms instead of many small ones. In the refrigerator industry, for example, the size of firm necessary to achieve the lowest possible cost per unit is large enough to limit the market to only a few firms. In most cities, economies of scale leave room for only a single newspaper.
One factor that can limit the achievement of economies of scale is the demand facing an individual firm. The scale of output required to achieve the lowest unit costs possible may require sales that exceed the demand facing a firm. A grocery store, for example, could minimize unit costs with a large store and a large volume of sales. But the demand for groceries in a small, isolated community may not be able to sustain such a volume of sales. The firm is thus limited to a small scale of operation even though this might involve higher unit costs.