Economies of Scale Chapter 13 completion. The Shape of Cost Curves Quantity of Output Costs $3.00...
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Economies of Scale Chapter 13 completion
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Transcript of Economies of Scale Chapter 13 completion. The Shape of Cost Curves Quantity of Output Costs $3.00...
Economies of ScaleChapter 13 completion
The Shape of Cost Curves
Quantity of Output
Costs
$3.00
2.50
2.00
1.50
1.00
0.50
0 42 6 8 141210
MC
ATC
AVC
AFC
Note how MC hits both ATC & AVC at their minimum
•When MC < ATC => average total cost is falling
•When MC > ATC => average total cost is rising
AFC always declines:
Fixed Costs spread over more output
ATC is U-shaped
Due to high fixed costs
Finding Economic Profit
1) Profit = TR – TC
There are several formulas to calculate profit:
2) Profit = (Price – ATC) X Qty (most useful formula)
Market Price = P1
If P1 > ATC => Economic Profit
If P1 < ATC => Economic Loss
Practice Test Page 1
Economies of Scale
• Economies of scale- – ATC falls as output increases– Allows for specialization of workers– Leads to more productivity per worker
• Diseconomies of scale- – ATC rises as output increases– coordination problems eventually arise as firms grow in size
• Constant returns to scale- – ATC stays the same as output increases
Quantity0
Price
MCMC ATCATC
Short Run vs. Long Run Costs
• Costs depends on the time horizon considered– In the short run, some costs are fixed
– In the long run, all fixed costs become variable costs
– Why: Firms have time to change both plant size & labor force
• Therefore, long-run cost curves differ from short-run cost curves
Long Run ATC
Quantity ofCars per Day
0
AverageTotalCost
1,200
$12,000
1,000
10,000
Economiesof
scale Diseconomiesof
scale
Constantreturns to
scale
LRATC
Note! => The “term” economies of scale applies only to long run cost curves
Long Run vs. Short Run ATC• LRATC is always below or on short run ATC curve
– you can be more efficient in long run!
Quantity ofCars per Day
0
AverageTotalCost
1,200
$12,000
1,200
$12,000
1,000
10,000
1,000
10,000
1,000
10,000
Economiesof
scale
Economiesof
scale
Economiesof
scale
Short run ATC
small factory
Short run ATC
small factory
Short run ATC
medium factory
Short run ATC
medium factory
Short run ATC
large factory
Short run ATC
large factory
Diseconomiesof
scale
Diseconomiesof
scale
Diseconomiesof
scale
Constantreturns to
scale
Constantreturns to
scale
LRATC
Practice Test Page 2
Reasons to LOVE Wal-Mart
Keeps prices very lowSaved consumer 20 billion a yearOverall, may save 100 billion per year
This Lowers inflation and ↑ GDP
Circular FlowPRODUCERS CONSUMERS
Factors
Products
Land, Labor & Capital
Reasons to HATE Wal-Mart
Keeps wages lowPuts local companies out of businessAccused of “abusing” worker rightsPredatory Pricing?
Cost Curves for a Typical Firm
Quantity of Output
Costs
$3.00
2.50
2.00
1.50
1.00
0.50
0 42 6 8 141210
MC
ATCAVC
AFC
MC declines & then increases (diminishing marginal product)
Price/Costs
Quantity
