Chapter 9 part 2

Businesses and the Costs of

Production
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 Marginal Cost
$200

MC
150

ATC
Costs

100
AVC
AFC

50
AVC

AFC
0 1 2 3 4 5 6 7 8 9 10 Q
LO3 9-2
 Long Run Production Costs

The firm can change all input amounts, including plant size
All costs are variable in the long run
Long run ATC
Different short run ATCs

LO4 9-3
 Firm Size and Costs

ATC-1
Average total costs ATC-5
ATC-2
ATC-3 ATC-4

Output

LO4 9-4
 The Long-Run Cost Curve

ATC-1
Average total costs
ATC-5
ATC-2
ATC-3 ATC-4 Long-run
ATC

Output

LO4 9-5
 Before we move on

Please understand that the U shape of the long rung AVG TC

cannot be the result of:
rising resource prices
Or the law of diminishing returns

9-6
 Why?

First, we assume that resource prices are constant

Second, the law of diminishing returns does not apply to
production in the long run.
This is true because the of diminishing returns only deals with
situations in which a productive resource or input is held
constant.

9-7
 In the long run.

But in the long run, by definition all resources and inputs are
variable.

9-8
 Economies of Scale

Economies of scale
Labor specialization
Managerial specialization
Efficient capital
Other factors
Constant returns to scale

LO4 9-9
 Diseconomies of Scale

Diseconomies of scale
Control and coordination problems
Communication problems
Worker alienation
Shirking

LO4 9-10
 MES and Industry Structure

Minimum efficient scale (MES)

Lowest level of output at which long run average costs are
minimized
Can determine the structure of the industry
Natural monopoly
Long run costs are minimized when one firm produces the
product

LO4 9-11
 MES and Industry Structure

Economies Constant returns Diseconomies

Average total costs of scale to scale of scale

Long-run
ATC

q1 q2
Output

LO5 9-12
 MES and Industry Structure

Economies Diseconomies
Average total costs of scale of scale

Long-run
ATC

Output

LO5 9-13
 MES and Industry Structure

Economies Diseconomies
of scale of scale

Average total costs

Long-run
ATC

Output

LO5 9-14
 Applications and Illustrations

Rising gasoline prices

Successful start-up firms
Verson stamping machine
The daily newspaper
Aircraft and concrete plants

LO5 9-15
 3D Printers and Mass
Customization

First industrial revolution began in 1700s

Mass production led to mass affordability
Second industrial revolution began late 1800s
Mass sales were necessary to spread R&D costs
Third industrial revolution is beginning Now
Affordable mass customization with zero transportation costs

9-16
 Marginal Cost
$200

MC
150

ATC
Costs

100
AVC
AFC

50
AVC

AFC
0 1 2 3 4 5 6 7 8 9 10 Q
LO3 9-17