3 The advantages of buying in bulk may have disappeared once certain quantities

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3. The advantages of buying in bulk may have disappeared once certain quantities are reached. At some point, available supplies of key inputs may be limited, pushing their costs up .

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42 of 43 economies of scale Situation in which output can be doubled for less than a doubling of cost. diseconomies of scale Situation in which a doubling of output requires more than a doubling of cost. Increasing Returns to Scale: Output more than doubles when the quantities of all inputs are doubled. Economies of Scale: A doubling of output requires less than a doubling of cost. Economies of scale are measured in terms of a cost-output elasticity, E C . E C is the percentage change in the cost of production resulting from a 1-percent increase in output: (7.5) Rewrite equation as follows: E C is 1 when MC equal to AC. (7.6) 𝐸 𝐶 = Τ Τ ∆C C Τ ∆? ? 𝐸 𝐶 = Τ Τ ∆C ∆? Τ C ? = Τ MC AC
43 of 43 The Relationship between Short-Run and Long-Run Cost LONG-RUN COST WITH ECONOMIES AND DISECONOMIES OF SCALE F IGURE 7.10 Three plant sizes - long-run average cost curve LAC is the envelope of the short-run average cost curves SAC 1 , SAC 2 , and SAC 3 . At q0 or q1 (small plant), SAC is \$8. If increase output to q2 or q3, a larger plant size would be most efficient or better choice as decreases AC. With economies and diseconomies of scale, the minimum points of the short- run average cost curves do not lie on the long-run average cost curve.

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44 of 43 Summing Up Increase production output when: Marginal revenue (MR) > marginal cost (MC) MC is lower than average total cost (ATC or AC): ATC is falling Decrease production output when: MR < MC MC is higher than ATC: ATC is rising Profit maximized when MR = MC (earns zero economic profit and positive accounting profit) Cost minimized when MC = ATC
• Fall '18
• Mike Leu

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