Long-run (the time it takes for the industry to adjust output to the change in demand or supply)

equilibrium for the purely competitive firm

P

Q

ATCMC

MR

PR

ICE

QUANTITY

Zero Economic

Profit

AVC

The cost curves we used in previous activities were short-run curves.

P

Q

ATCMC

MR

PR

ICE

QUANTITY

Zero Economic

Profit

AVC

In the short-run, firms can vary output but not plant capacity.

P

Q

ATCMC

MR

PR

ICE

QUANTITY

Zero Economic

Profit

AVC

Average Fixed cost

Now we turn to the long-run: a time period in which the firm can vary its plant capacity

and output

P

Q

ATCMC

MR

PR

ICE

QUANTITY

Zero Economic

Profit

AVC

In the short-run, the shapes of the average and marginal cost curves result from diminishing marginal productivity of the resources.

P

Q

ATCMC

MR

PR

ICE

QUANTITY

Zero Economic

Profit

AVC

So in the long-run for the firm, we only have a total cost curve, since all costs are variable. LRATC is created from the different ATC curves (now called SRATC) of the plant capacity (different size or number of

plants) over time.

P

Q

SRATCMC

MR

PR

ICE

QUANTITY

Zero Economic

Profit

AVC

LRATC is created from the different ATC curves (now called SRATC) of the plant capacity (different size or number of plants) over time.

SRATC 1

PR

ICE

QUANTITY

SRATC 2SRATC

LRATC

In the long-run for the firm, the shape of LRATC results from economies and diseconomies of scale

see chapter 9, pgs 176 - 181

P

Q

SRATC

PR

ICE

QUANTITY

Q1

SRATC1 SRATC2SRATC3

LRATC

Sources ofEconomies of scale

• Specialization in resources

• More efficient uses of equipment

• A reduction of per-unit costs of factor inputs

• An effective use of production by-products

• An increase in shared facilities

Sources ofDiseconomies of scale

see chapter 10, pgs 204-205

• Limitations on management decision making

• Competition for factor inputs

Quick Quiz #1 what do the minimum points of each of the short-run ATC curves

represent?

P

Q

SRATC 1

PR

ICE

QUANTITY

Q1

SRATC 2SRATC

Quick Quiz #1 what do the minimum points of each of the short-run ATC curves

represent?

P

Q

SRATC 1

PR

ICE

QUANTITY

Q1

SRATC 2SRATC

Quick Quiz #2the firm can minimize costs by producing output level Q

using firm size _______. This means it would be over/under utilizing firm size SRATC / SRATC1

P

Q

SRATC 1

PR

ICE

QUANTITY

Q1

SRATC 2SRATC

LRATC

the firm can minimize costs by producing output level Q using firm size SRATC.

This means it would be over utilizing firm size SRATC

P

Q

SRATC 1

PR

ICE

QUANTITY

Q1

SRATC 2SRATC

LRATC

Quick Quiz #3label the optimum output level in the graph as QLR

P

Q

SRATC 1

PR

ICE

QUANTITY

Q1

SRATC 2SRATC

LRATC

QLR: the optimum output level

P

Q

SRATC 1

PR

ICE

QUANTITY

Q1

SRATC 2SRATC

LRATC

QLR

Quick Quiz #4To produce at output level Q1, the firm should use plant size ______.

This would over / under utilize plant size (SRATC1 / SRATC2)

P

Q

SRATC 1

PR

ICE

QUANTITY

Q1

SRATC 2SRATC

LRATC

To produce at output level Q1, the firm should use plant size SRATC2.

This would underutilize plant size SRATC2

P

Q

SRATC 1

PR

ICE

QUANTITY

Q1

SRATC 2SRATC

LRATC

Qlr

Quick Quiz #5The firm experiences economies of scale up to output level ____ ,

and diseconomies of scale beyond output level _____.

P

Q

SRATC 1

PR

ICE

QUANTITY

Q1

SRATC 2SRATC

LRATC

QLR

The firm experiences economies of scale up to output level QLR

, and diseconomies of scale beyond output level QLR

.

P

Q

SRATC 1

PR

ICE

QUANTITY

Q1

SRATC 2SRATC

LRATC

QLR

the firm, in the graph, experiences constant returns to scalebetween output levels Q1 and Q2.

Give an example of a type of firm that experiences constant returns to scale.

P

Q

SRATC

PR

ICE

QUANTITY

Q3

SRATC1 SRATC2SRATC3

LRATC

Q2Q1

Constant returns to scale

• changes in the number of firms in the industry have little effect on the costs of individual firms in the industry

• Furniture industry– There are trees available for lots of reasons, from

housing, to paper, to Christmas trees, to furniture, and any one furniture firm is a relatively small percentage of the total demand for wood

• Household appliance industry– There is steel available for lots of industries, and any

one household appliance firm is a relatively small percentage of the demand for steel