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

3 the advantages of buying in bulk may have

This preview shows page 41 - 44 out of 44 pages.

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 .
Image of page 41

Subscribe to view the full document.

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
Image of page 42
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.
Image of page 43

Subscribe to view the full document.

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
Image of page 44
  • Fall '18
  • Mike Leu

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask You can ask ( soon) You can ask (will expire )
Answers in as fast as 15 minutes