Long Run Average Total Cost Curve

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Long Run Average Total Cost Curve
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The Long Run Average Total Cost Curve

• When studying cost curves, remember that we have
  been in the short run.
• In the short run, the average total cost curve
  has been u-shaped.

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What is the shape of the Long Run Average Total
Cost Curve?
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Long Run Average Total Cost Curve

• The long run average total cost curve is made up
  of a series of short run ATCS. Each ATC is for
  a different time period, and represents the
  average total costs at that point in time, for
  those outputs.

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Long Run Average Total Cost Curve

• Studies have shown that the minimum point of the
  short run ATCS first falls, and then rises.

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Graphing The Long Run Average Total Cost Curve

• When we graph the long run ATC, we graph the
  minimum point of all of the various short run
  ATCS.

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Graphing The Long Run Average Total Cost Curve

• The long run average total cost curve turns out
  to be u-shaped.

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Shape Of The Long Run Average Total Cost Curve

• Why is the long run average total cost curve
  initially downwards sloping?
• Economies of Scale explain the falling costs.

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Causes of Economies of Scale
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Causes of Economies of Scale

• Labor Specialization
• 2 Management Specialization
• 3 Efficient Use of Capital
• 4 Efficient Use of By-Products

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Labor Specialization

• A With more workers, firms can subdivide the
  work. Workers can become more efficient and
  faster at their job.

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Management Specialization

• B With more managers, the firm can subdivide the
  work of management, into specialized jobs. Each
  job can then be done more efficiently.

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Many Technologies work most efficiently (cheaply)
in larger production batches.
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Efficient Capital Use

• C Many Technologies work most efficiently
  (cheaply) in larger production batches.

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Efficient Use of By-Products

• D Firms cut costs by using all of the raw
  materials that they purchase by find new products.

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Causes of Diseconomies of Scale
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Diseconomies of Scale

• Why does the long run average total cost curve
  becomes upwards sloping?
• Diseconomies of Scale explains the rising costs.

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Causes of Diseconomies of Scale

• Worker Alienation
• 2 Communication Problems
• 3 Coordination and Control Problems

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Worker Alienation

• A - Large numbers of unhappy workers require
  ever larger numbers of supervisors, who do not
  directly produce, but must be paid.

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Communication Problems

• B- In all firms, information is lost or
  distorted as it is passed up and down in large
  bureaucracies.

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Coordination and Control

• C - Control and coordination is hard to maintain
  in large bureaucracies.

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Diseconomies of Scale

• For all of these reasons, companies that become
  too large experience diseconomies of scale.

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Long Run Average Total Cost Curves

• History tells us that companies become more
  efficient as they become larger, but that if they
  get too large, they become inefficient.
• What will happen to all of these companies that
  have recently merged?.