Long Run Average Total Cost Curve

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.

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

Long Run Average Total Cost Curve

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

Long Run Average Total Cost Curve

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

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 ATC’S.

Graphing The Long Run Average Total Cost Curve

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

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.

Causes of Economies of Scale

Causes of Economies of Scale

1 Labor Specialization

2 Management Specialization

3 Efficient Use of Capital

4 Efficient Use of By-Products

Labor Specialization

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

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.

Many Technologies work most efficiently (cheaply) in larger

production batches.

Efficient Capital Use

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

Efficient Use of By-Products

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

Causes of Diseconomies of Scale

Diseconomies of Scale

• Why does the long run average total cost curve becomes upwards sloping?

• Diseconomies of Scale explains the rising costs.

Causes of Diseconomies of Scale

1 Worker Alienation

2 Communication Problems

3 Coordination and Control Problems

Worker Alienation

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

Communication Problems

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

Coordination and Control

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

Diseconomies of Scale

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

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?.