Structure of Costs in the Long Run
Read this chapter. As you read and begin to understand what economies of scale are, create your own definition and see how it is similar or different from the text. In addition, focus on the diseconomies of scale to see what happens when a factory grows too quickly and becomes increasingly difficult to manage.
The Structure of Costs in the Long Run
Learning Objectives
- Calculate total cost
- Identify economies of scale, diseconomies of scale, and constant returns to scale
- Interpret graphs of long-run average cost curves and short-run average cost curves
- Analyze cost and production in the long run and short run
The long run is the period of time when all costs are variable. The long run depends on the specifics of the firm in question – it is not a precise period of time. If you have a one-year lease on your factory, then the long run is any period longer than a year, since after a year you are no longer bound by the lease. No costs are fixed in the long run. A firm can build new factories and purchase new machinery, or it can close existing facilities. In planning for the long run, the firm will compare alternative production technologies (or processes).
In this context, technology refers to all alternative methods of combining inputs to produce outputs. It does not refer to a specific new invention like the tablet computer. The firm will search for the production technology that allows it to produce the desired level of output at the lowest cost. After all, lower costs lead to higher profits – at least if total revenues remain unchanged. Moreover, each firm must fear that if it does not seek out the lowest-cost methods of production, then it may lose sales to competitor firms that find a way to produce and sell for less.
Source: Rice University, https://opentextbc.ca/principlesofeconomics/chapter/7-3-the-structure-of-costs-in-the-long-run/
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