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.
Download our ap micro survival pack and get access to every resource you need to get a 5.
ap micro
💸 Unit 1: Basic Economic Concepts
1.0Unit 1: Basic Economic Concepts
📈 Unit 2: Supply and Demand
⚙️ Unit 3: Production, Cost, and the Perfect Competition Model
3.7Perfect Competition
📊 Unit 4: Imperfect Competition
💰 Unit 5: Factor Markets
🏛 Unit 6: Market Failure and Role of Government
continue learning
Fiveable Community students are already meeting new friends, starting study groups, and sharing tons of opportunities for other high schoolers. Soon the Fiveable Community will be on a totally new platform where you can share, save, and organize your learning links and lead study groups among other students!🎉
*ap® and advanced placement® are registered trademarks of the college board, which was not involved in the production of, and does not endorse, this product.
© fiveable 2021 | all rights reserved.
2550 north lake drive
suite 2
milwaukee, wi 53211