Class03_07 - Def. Diseconomies of scale Diseconomies of...

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07/03/2008 Class Notes (cover part of Chapter 9 in the textbook) Class Outline Long-Run Cost Long-Run Cost In the long-run all factors are variable: FC=0 In the long-run a firm chooses its plant size which in turn depends on the level of output it wants to produce. Example: suppose the firm can decides between three plant sizes: small (1), medium (2), large (3); For each plant the ATC functions are represented below: 1

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For each level of output we can determine which plant size minimizes the average total cost The green scallop-shaped curve made of the three segments of average total cost curves is the long-run average cost (LARC) curve. If we think that a firm can choose between many and many different plant-sizes the LRAC becomes: ATC1 ATC2 ATC3 Q2 2 Q3 Q \$ Q1
Def. Economies of scale Economies of scale are features of a firm’s technology that lead to falling long-run average cost as output increases.

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Unformatted text preview: Def. Diseconomies of scale Diseconomies of scale are features of a firms technology that lead to increasing long-run average cost as output increases. Def. Constant returns to scale Constant returns to scale are features of a firms technology that lead to a constant long-run average cost as output increases. Min of LRAC Constant returns to scale Economies of scale Diseconomies of scale Q LRAC Q* 3 \$ A firm experiences economies of scale up to some output level. Beyond that level, it moves into constant returns to scale or to diseconomies of scale. Def. Minimum Efficient Size (MES) A firms minimum size is the smallest quantity of output at which long-run average cost reaches its lowest level. In the last two graphs above the MES is given by Q*!!! Q \$ Q* Constant Returns to scale 4...
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This note was uploaded on 04/29/2008 for the course ECON 251 taught by Professor Blanchard during the Spring '08 term at Purdue University-West Lafayette.

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Class03_07 - Def. Diseconomies of scale Diseconomies of...

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