All Flashcards
Define Long-Run Costs.
Costs when all inputs are variable; firms can adjust plant size, equipment, and labor.
What is the LRATC curve?
The lowest possible average total cost for each output level when all inputs are variable.
Define Economies of Scale.
A firm's average costs decrease as its output increases.
Define Diseconomies of Scale.
A firm's average costs increase as its output increases.
Define Constant Returns to Scale.
A firm's average costs stay constant as its output increases.
What is the short run?
A time period where at least one input is fixed.
What is the long run?
A time period where all inputs are variable.
Define Specialization.
Workers become experts at specific tasks, boosting efficiency.
Define Bulk Buying.
Larger firms can negotiate lower prices for inputs.
Define Bureaucracy.
Red tape and slow decision-making can increase costs.
What does the downward-sloping portion of the LRATC curve represent?
Economies of scale, where average costs decrease as output increases.
What does the upward-sloping portion of the LRATC curve represent?
Diseconomies of scale, where average costs increase as output increases.
What does the flat portion of the LRATC curve represent?
Constant returns to scale, where average costs remain constant as output increases.
How are SRATC curves related to the LRATC curve?
The LRATC curve is formed by the minimum points of all possible SRATC curves.
What does a point on the LRATC curve represent?
The most efficient scale of production for that output level.
How does the LRATC help firms with production decisions?
It shows the lowest possible average total cost for each output level, guiding decisions on plant size and production scale.
What does a shift in the LRATC curve indicate?
A change in the underlying cost structure of the firm, possibly due to technological advancements or changes in input prices.
How can a firm identify if it is operating at the minimum efficient scale (MES)?
By locating the lowest point on the LRATC curve, which represents the output level where average costs are minimized.
How does the shape of the LRATC curve influence market structure?
The shape of the LRATC curve can determine whether a market is likely to be dominated by a few large firms or many small firms.
What does it mean if a firm's SRATC curve is above the LRATC curve?
The firm is not operating at the most efficient scale for its current output level and could reduce costs by adjusting its inputs.
How do economies of scale apply to a large car factory?
Specialized workers, bulk buying of materials, and efficient equipment lower average production costs.
How do diseconomies of scale affect a rapidly growing tech company?
Management issues, loss of focus, and bureaucracy can increase average costs as the company expands.
How does the LRATC curve guide a firm's investment decisions?
It helps firms choose the optimal plant size and production level to minimize average total costs in the long run.
Explain how specialization leads to economies of scale.
When workers specialize, they become more efficient, increasing output and lowering average production costs.
How does bulk buying contribute to economies of scale?
Buying inputs in large quantities allows firms to negotiate lower prices, reducing average costs.
Why might a small business avoid rapid expansion?
To avoid diseconomies of scale such as management issues and loss of focus, which can increase costs.
How do management issues lead to diseconomies of scale?
Coordination and communication become difficult as a firm grows, leading to inefficiencies and higher costs.
How does loss of focus lead to diseconomies of scale?
A firm may become less efficient if it expands into areas outside its core expertise, increasing average costs.
How does bureaucracy contribute to diseconomies of scale?
Red tape and slow decision-making can increase costs and reduce efficiency as a firm grows larger.
How does a firm determine if it has reached constant returns to scale?
The firm's average costs remain stable as output increases, indicating it is operating at its most efficient size.