Hank 瀚克

LOS 14.f: Describe how economies of scale and diseconomies of scale affect costs.

While plant is fixed in the short run, in the long run, firms can choose their most profitable scale of operations.

Because the long-run average total cost (LRATC) curve is drawn for many different plant sizes or scales of operation, each point along the curve represents the minimum ATC for a given plant size or scale of operations.

We draw the LRATC curve as U-shaped.

Average total costs first decrease with larger scale and eventually increase.

The lowest point on the LRATC corresponds to the scale or plant size at which the average total cost of production is at a minimum. 👉 This scale is sometimes called minimum efficient scale

Under perfect competition:

firms must operate at minimum efficient scale in the long-run equilibrium, and LRATC will equal the market price.

Firms earn zero economic profit in the long-run equilibrium.

Firms that have chosen a different scale of operations with higher average total cost will have economic losses and must either leave the industry or change to minimum efficient scale.

The downward-sloping segment of the long-run average total cost curve indicates that economies of scale are present.

Economies of scale result from factors such as:

1. Labor specialization.
2. Mass production.
3. Invest in more efficient equipment and technology.
4. The firm may be able to negotiate lower input prices with suppliers as firm size increases and more resources are purchased.

A firm operating with economies of scale can increase its competitiveness by expanding production and reducing costs.

The upward-sloping segment of the LRATC curve indicates that diseconomies of scale are present.

Diseconomies of scale result from factors such as:

1. The increasing bureaucracy of larger firms leads to inefficiency.
2. Problems with motivating a larger work force.
3. Greater barriers to innovation and entrepreneurial activity.

A firm operating under diseconomies of scale will want to decrease output and move back toward the minimum efficient scale.

There may be a relatively flat portion at the bottom of the LRATC curve that exhibits constant returns to scale.

圖片來源 CFA 2019 NOTE