⏱️ November 15, 2020
In the long-run, all resources are flexible, so firms can change both their plant capacity and output level. This allows firms to analyze and compare the average total cost of production at each plant capacity in the short-run, and find the optimal plant capacity that allows them to product output at the lowest possible ATC.
In the graph below, the blue curves show several different plant capacities for a particular firm. SRATC1 is when production is beginning and the firm is not using its entire plant capacity. The low production hinders mass production, causing the ATC to be very high. For example, a car company that makes only 50 cars will have a very high cost per car.
As the firm continues production, its growing capacity enables mass production and specialization to take place, which leads to the point where ATC is at its lowest. A car company that produces 100,000 cars will have a very low average cost per car (SRATC2). As the firm expands and its output becomes larger than its plant capacity, it becomes too big to manage. Its costs per unit begin to rise again. This is the point where there is too much input needed, socosts rise (SRATC3).
The U-shape of the long-run ATC (LRATC) curve is a result of economies of scale and diseconomies of scale that is experienced by the firm.
The light blue area represents economies of scale because as output is increasing, costs are decreasing. The light yellow area represents a constant return to scales because as output continues to increase, costs remain constant. The light green area represents diseconomies of scale because as output increases, costs rise.
💸 Unit 1: Basic Economic Concepts
1.0Unit 1: Basic Economic Concepts
1.1Basic Economic Concepts: Scarcity
1.2Resource Allocation and Economic Systems
1.3Production Possibilities Curve (PPC)
📈 Unit 2: Supply and Demand
2.4Price Elasticity of Supply
2.6Market Equilibrium and Consumer and Producer Surplus
2.7Market Disequilibrium and Changes in Equilibrium
2.8The Effects of Government Intervention in Markets
⚙️ Unit 3: Production, Cost, and the Perfect Competition Model
3.6Firms' Short-Run Decisions to Produce and Long-Run Decisions to Enter or Exit a Market
📊 Unit 4: Imperfect Competition
4.1Introduction to Imperfectly Competitive Markets
💰 Unit 5: Factor Markets
5.2Changes in Factor Demand and Factor Supply
5.3Profit-Maximizing Behavior in Perfectly Competitive Factor Markets
🏛 Unit 6: Market Failure and Role of Government
6.1Socially Efficient and Inefficient Market Outcomes
6.3Public and Private Goods
6.4The Effects of Government Intervention in Different Market Structures
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