Econ101October22 - Econ 101 I External Economies and...

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Econ 101 October 22, 2007 I. External Economies and Diseconomies of Scale a. If industry long run supply curve is perfectly elastic then the industry exhibits no external economies or diseconomies. The firms grows by replicating firms at efficient scale i. “Constant Cost” industry ii. Growth isn’t associated with technological progress iii. Doesn’t change price of inputs iv. Long Run Supply Curve 1. Horizontal b. If industry long run supply curve is upward sloping, then the industry exhibits external diseconomies of scale. The minimum average total cost of all firms in the industry rises as the size of market grows i. Prices of inputs rise as industry expands ii. This can also occur because the industry becomes “congested” and the minimum average total cost at the efficient scale rises iii. Price of specialized factors could increase iv. The industry (not the firm) grows c. If the industry long run supply curve is downward sloping, then the industry exhibits external economies of scale. The minimum average total
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