Can you please give me 5 intelligent questions about this power point to ask to
ID: 1110378 • Letter: C
Question
Can you please give me 5 intelligent questions about this power point to ask to the presenter?
THE SHAPE OF THE LONG-RUN AVERAGE COST CURVES IN VARIOUS INDUSTRIES
LONG-RUN AVERAGE COST
CURVE
• The Long Run Average Cost (LRAC) curve shows the minimum or lowest
average total cost at which a firm can produce any given level of output
in the long run (when all inputs are variable).
At the point where the
LRAC curve has zero slope,
the firm is experiencing
constant returns to scale.
• In the decreasing part of
the LRAC, long-run
average costs are falling
due to teamwork and
specialization so the firm is
experiencing increasing
returns to scale.
• In the increasing part of the
LRAC curve, where costs
are increasing due to
congestion and influence
activities, the firm
experiences decreasing
returns to scale.
Each output point on the LRAC
curve represents a particular
combination of capital and
labor.
• In the long run, a firm can
change both capital and
labor.
• Each output level on the LRAC
curve represents a
combination of capital and
labor that is possible in the long
run.
• In the short run, capital is frozen
at a particular level.
• The LRAC curve is an
“envelope” containing all
possible short-run cost curves.
• Each average total cost
(ATC) curve represents a
manufacturing scale where
the only way to increase
output is to hire more
workers.
• It is for this reason that the
ATC curve lies above the
LRAC curve except at one
point of tangency.
• The point of tangency is the
cost minimizing point for that
level of output.
The short-run ATC curves
represent different
scales of plant that
cannot be changed in
the short run.
• They are all above the
LRAC because firms
have less flexibility in the
short run and costs are
higher.
• Each tangency point is
the cost-minimizing
point for that level of
output.
The LRAC for most firms
is U-shaped reflecting
first,
• increasing returns to
scale;
• at some point
constant returns to
scale;
• and finally,
decreasing returns to
scale.
On the LRAC, there is at
least one point where a
tangent line has a slope
of zero.
• This is the point where
long-run average costs
are at the lowest for the
firm.
• The tangent line is
horizontal at the point
on the LRAC curve
where the slope is zero.
The output and cost
combination where the
firm is experiencing
constant returns to scale
is called the point of
efficient scale.
• In the long run, the firm
can do no better than
this combination
because at no other
point in the long run can
its average, or per unit
cost, become less.
SUMMARY
• Long-Run Average Cost Curve is a Ushaped
curve that shows all possible
output levels plotted against the
average cost for each level
• It contains all possible short-run average
total cost curves
• It is made up of all of the average total
cost curve tangency points
SUMMARY CONTINUED
• All average total cost curves are
short-run curves.
• The point of efficient scale is the
point on the long-run average cost
curve where average cost is at the
minimum.
Explanation / Answer
The presentaton states that "Each average total cost (ATC) curve represents a manufacturing scale where the only way to increase output is to hire more workers". But with such rapid developments in technology and robotics, can the output not be increased by employing more such machinery which are readily available in the market and can easily replace labor more efficiently? How are the profits of the firms in the industry affected as it moves along the LRAC? Even though in the long run, average cost falls in the industry, does that necessarily mean that the prices are also lowered and the benefits are passed on to the consumers? ( For example, IPhone prices havent fallen even though the output has increased over a period of time) The model assumes the homogeneous production of goods. But in reality firms are producing heterogenous good. Does the U- shaped LRAC curve present the actual reality of the various industries especially the one which are providing services? Can you give me an example of an a specific product which faced the similar long run avervage cost curve, which initially realised economies of scale but later led to diseconomies of scale?