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Long run average total cost curve relating to economies and diseconomies of scale
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Latest Highest Rated. Lets put this in plain terms by going back to your Back to the Business Future auto plant. Now suppose that this pattern kept repeating itself and that you kept building larger and larger plants. What do you think would happen to your firms average cost as plant scale increased? Page Down to advance the presentation 3 The Long Run Average Cost Curve The long run average cost curve is the envelope of the short run average cost curves.
If producing 40, VCRs costs the firm 16, or each but producing , VCRs costs the firm 40, or each, there are significant economies of scale associated with the higher output level. The question, of course, is what accounts for these economies. Try jotting down a few reasons. Page Down to advance the presentation 9 Related Factors Labor specialization Managerial specialization Efficient capital By-products Other such factors 10 Labor Specialization Increased labor specialization means dividing and sub-dividing jobs as plant size increases.
Instead of performing five or six jobs, a worker can focus on one. In a small plant, a skilled machinist might spend half the time performing unskilled tasks leading to higher production costs.
Greater specialization also eliminates the loss of time that occurs when workers shift between jobs. Page Down to advance the presentation 11 Managerial Specialization With managerial specialization, a supervisor who can handle twenty workers will be under-used in a small plant as will a sales specialist who may have to divide his or her time between other managerial functions such as marketing, personnel, and finance.
Page Down to advance the presentation 12 Efficient Capital Use Larger plant size also facilitates the most efficient capital use. In the auto industry, the most efficient production method involves robotics and sophisticated assembly line equipment.
But effective use of such machinery and equipment requires an output of at least , cars. Page Down to advance the presentation 13 By-Products Larger scale production also allows better use of by-products. For example, a large meat packing plant will also make glue, fertilizer, and pharmaceuticals from animal remains which would be otherwise be discarded by smaller producers. Page Down to advance the presentation 14 Other Factors Finally, there are other factors such as design, development, and certain other start-up costs that must be incurred irrespective of sales.
These costs per unit decline as output increases. Page Down to advance the presentation 15 The B-2 or "Stealth Bomber" The Pentagon originally wanted to build of the planes at a cost of million per plane.
But the Secretary of Defense slashed the Pentagons request to only 75 bombers. The result The cost per plane soared to over million due to the loss of scale economies. Page Down to advance the presentation 16 Diseconomies Of Scale LATC Costs per unit Page Down to advance the presentation Quantity 17 Causes of Diseconomies of scale Managerial problems efficiently controlling and coordinating a firms operations as it becomes a large-scale producer.
At some point, a plant just gets too big for effective management. In massive production facilities, workers may begin to feel alienated from their jobs and efficiency may suffer. Page Down to advance the presentation 18 The US Auto Industry In recent years, GM the worlds largest corporation has found itself with both a declining market share and a substantial cost disadvantage.
In fact, GMs labor costs per car are nearly more than Fords and more than Chryslers. The goal is to reduce the layers of managerial approval required in decision making so each division can respond more rapidly. Banks could close some of their branches and combine support services such as computer processing, advertising, auditing, and legal work. Studies found that the mergers did not significantly reduce costs. One possible explanation is constant returns to scale over a broad spectrum of output.
The result is that price is set too high and output too low. Page Down to advance the presentation 27 Constant Returns To Scale Because of the extended range of constant returns to scale, relatively large and small firms can coexist and be equally viable. Page Down to advance the presentation 29 Oligopoly A large minimum efficient scale can also give rise to another type of industry structure known as oligopoly.
An oligopolistic industry is characterized by a small number of large sellers. Examples include automobiles, aluminum, steel, and cigarettes. Page Down to advance the presentation 30 The Broader Point The shape of an industrys long run average cost curve has an enormous influence on the structure of that industry. Will it be competitive, oligopolistic, or monopolistic? Now there are just two more tasks we have to complete the difference between economic profits and accounting profits and clean up a few things about the supply curve Page Down to advance the presentation 33 The Supply Curve In the next lesson, Ill show you how to derive that curve from the upward sloping marginal cost curve.
However, for now, lets just point out several common traits that the supply curve has with the demand curve we learned about in the last lecture. When the price of a good increases, the quantity of that good supplied will increase.
This means, of course, that the supply curve is upward sloping. Page Down to advance the presentation 35 The Price Elasticity Of Supply Second, just as there is a price elasticity of demand, there is a price elasticity of supply.
Knowing what you know about demand elasticity, try writing the supply elasticity formula. Page Down to advance the presentation 36 The Elasticity Formula change in quantity supplied change in price Page Down to advance the presentation 37 Determinants Of Elasticity The most important determinant of the elasticity of supply is the number of substitutes for the good.
If substitution is easy, supply will be elastic If substitution is difficult, supply will be inelastic. Try drawing an elastic, inelastic, and unit elastic supply curve. Accounting Profits Lets talk about how an economist measures a firms costs and profits versus how an accountant measures them.
Long Run Cost Analysis - PowerPoint PPT Presentation
In this regard, an economist as opposed to an accountant will always count not only explicit costs but implicit costs as well. Implicit Costs Explicit costs are your monetary payments to outsiders for things like labor, materials, fuel, transportation and power. Implicit costs represent the money payments you could have earned by employing your own resources in their best alternative use.
This distinction sheds further light on the concept of opportunity costs that we introduced in an earlier lecture. Page Down to advance the presentation 41 Opportunity Costs Includes all consequences, whether they reflect explicit monetary transactions or not.
The immediate dollar cost of going to a movie instead of reading your economics textbook is the price of the movie ticket. The opportunity cost also includes the possibility of gaining a better understanding of macroeconomics and therefore becoming more successful in business.
Page Down to advance the presentation 42 Suppose both you and your spouse earn after tax salaries of 45, a year as sales representatives for a hospital equipment distributor, but you want to do better.
So you both quit your jobs to open your own business -- a health food juice bar called Juice Me Up Scotty. You kick in another 30, of your own savings that had been earning you 1, annually in interest income from your portfolio of bond investments.
You also kick out a tenant in the storefront that you own who was paying you in rent per month. January 1,, to December 31, 1 Net sales after all discounts and rebates , Less cost of goods sold 2 Materials 30, 3 Labor cost 60, 4 Miscellaneous operating costs utilities, etc. January 1, , to December 31, 1 Net sales after all discounts and rebates , Less cost of goods sold 2 Materials 30, 3 Labor cost 60, 4 Miscellaneous operating costs utilities, etc.
Always consider your opportunity costs when you make a decision.
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Long Run Cost and It’s Types (With Diagram)
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Long run average cost curve ppt to pdf
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