Chapter 9 b LongRun Costs and Output Decisions

1
Chapter 9 bLong-Run Costsand Output Decisions
Appendix External Economies and Diseconomies
and the Long-Run Industry Supply Curve
2
Long-Run Costs Economies andDiseconomies of
Scale

• Increasing returns to scale, or economies of
  scale, refers to an increase in a firms scale of
  production, which leads to lower average costs
  per unit produced.

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The Long-Run Average Cost Curve

• The long-run average cost curve (LRAC) is a graph
  that shows the different scales on which a firm
  can choose to operate in the long-run. Each
  scale of operation defines a different short-run.

4
Constant Returns to Scale

• Constant returns to scale refers to an increase
  in a firms scale of production, which has no
  effect on average costs per unit produced.

5
Decreasing Returns to Scale

• Decreasing returns to scale, or diseconomies of
  scale, refers to an increase in a firms scale of
  production, which leads to higher average costs
  per unit produced.

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A Firm Exhibiting Economiesand Diseconomies of
Scale

• The LRAC curve of a firm that eventually exhibits
  diseconomies of scale becomes upward-sloping.

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Long-Run Competitive Equilibrium

• In the long run, equilibrium price (P) is equal
  to long-run average cost, short-run marginal
  cost, and short-run average cost. Profits are
  driven to zero.

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Appendix External Economies and Diseconomies
and the Long-Run Industry Supply Curve

• Economies of scale that are found within the
  individual firm are called internal economies of
  scale.
• External economies of scale describe economies or
  diseconomies of scale on an industry-wide basis.

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Appendix External Economies and Diseconomies
and the Long-Run Industry Supply Curve

• In a decreasing cost industry, costs decline as a
  result of industry expansion, and the LRIS is
  downward-sloping.

10
Appendix External Economies and Diseconomies
and the Long-Run Industry Supply Curve

• In an increasing cost industry, costs rise as a
  result of industry expansion, and the LRIS is
  upward-sloping.