Today is Tuesday, October 26, 2010.
The price of gold is $1,335 per ounce.
LONG-RUN AVERAGE COST
In the short run, at least one factor is fixed.
In the long run, all factors are
The short run ATC curve is always U-shaped.
There are few
restrictions on the shape of the LRAC (long run average cost) curve.
Diminishing returns applies only to firms operating in the short run, and result
from the fact that at least one factor is fixed.
Diminishing returns does not apply
to long run production functions.
However, returns can vary, for firms in the
long run, as the firm alters the
of its operations.
Sonny Hatley has
planted 400 acres in cotton this growing season.
That is his fixed factor.
can increase or decrease the number of bales he produces this growing season
by altering the variable factors that he uses between now and harvest time.
Diminishing returns will apply, if he tries to increase output by using more labor
and capital, in response to higher cotton prices.
If next year, he plants 800, or
1,600 or 5,000 acres in cotton, he will have altered the scale of his cotton
If his LRAC falls as he increases the scale of his operation,
increasing returns to scale
His long run cost curve falls as
output increases, just as occurs initially with his short run ATC curve.
For many firms, the LRAC curve is horizontal as the firm increases the scale of
If a tire company opens more and more tire plants, in different
cities, each plant with its own tire-making machinery and workers, there is no
reason why 10 plants couldn't make tires at the same cost per tire as a single
As long as the LRAC curve of a firm is downward sloping, the firm is
experiencing increasing returns to scale.
If the LRAC curve of a firm is
horizontal, the firm is experiencing constant returns to scale.
If the LRAC curve
increases as output increases, the firm is experiencing decreasing returns to
THE FIRM IN COMPETITION
We did not lecture on this in class, but we need to introduce the concept of long-run average cost.
to remember is that, in the long run, there are no fixed inputs, and it is the existence of fixed inputs in the short
run that gives rise to the law of diminishing returns, which is a result of having at least one fixed input.
long run, the average total cost curve can be upward sloping, or horizontal, or even downward sloping, over the
relevant range of output of the firm.