The Long Run ATC Curve (or the planning curve)

1
The Long Run ATC Curve(or the planning curve)

• shows the least per unit cost at which any output
  can be produced after the firm has had time to
  make all appropriate adjustments in its plant
  size.

2
Cost
SRATC1
At a relatively low output level, in the short
run, the firm might have SRATC1 curve as its
short run average cost curve.
Quantity of output
3
Cost
SRATC2
At a slightly higher output level, in the short
run, the firm might have SRATC2 curve as its
short run average cost curve.
Quantity of output
4
Cost
SRATC3
At a still higher output level, in the short run,
the firm might have SRATC3 curve as its short run
average cost curve.
Quantity of output
5
Cost
LRATC
SRATC1
SRATC5
SRATC2
SRATC4
SRATC3
In the long run, the firm can pick any
appropriate plant size. At each output level, the
firm picks the plant that has the SRATC curve
with the lowest value. So, the LRATC curve is
made up of segments of the SRATC curves.
Quantity of output
6

• In many industries, the number of possible plant
  sizes is virtually unlimited.
• Then the long-run ATC curve is made up of points
  of tangency of the theoretically unlimited number
  of short-run ATC curves.
• Then the long run ATC curve is smooth.

7
Cost
LRATC
SRATC1
SRATC5
SRATC2
SRATC4
SRATC3
Quantity of output
8
Why is the downward-sloping section of the Long
Run ATC curve downward-sloping?

• Economies of Scale

9
Economies of Scale As plant size increases,
there are factors which lead to lower average
costs of production.

• Labor Specialization Jobs can be subdivided and
  workers performing very specialized tasks can
  become very efficient at their jobs.
• Managerial Specialization Management can also
  specialize in a larger firm (in areas such as
  marketing, personnel, or finance).
• Equipment that is technologically efficient but
  only effectively utilized with a large volume of
  production can be used.

10
Why is the upward-sloping section of the Long Run
ATC curve upward-sloping?

• Diseconomies of Scale

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Diseconomies of Scale As plant size increases,
there are factors which lead to higher average
costs of production.

• Expansion of the management hierarchy leads to
  problems of communication, coordination, and
  bureaucratic red tape, and the possibility that
  decisions will fail to mesh. (The left hand
  doesnt seem to know what the right hand is
  doing.) The result is reduced efficiency.
• 2. In large facilities, workers may feel
  alienated and may shirk (not work as much as they
  should). Then additional supervision may be
  required and that adds to costs.

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Constant Returns to Scale

• when long-run ATC is constant

13
Minimum Efficient Scale (MES)

• the smallest level of output at which a firm can
  minimize long-run average costs.

14
Some Industry Possibilities
15
When there is an extended range of constant
returns to scale, we may find the industry
populated by firms of many different sizes.
Cost
LRATC
Minimum efficient scale MES
Quantity of output
16
Cost
When economies of scale continue up to a very
high level of output, average cost may be
minimized by having a single firm produce all of
the output. This is called natural monopoly.
LRATC
Quantity of output
17
Cost
When economies of scale are few and diseconomies
are quickly encountered, MES occurs at a small
level of output. We would then see a large
number of small firms.
LRATC
Minimum efficient scale MES
Quantity of output
18
Comment

• Industry structure does not depend on cost
  conditions alone.
• Other factors, such as government policies,
  geographic size of a market, and managerial
  ability may influence the structure of an
  industry.