3.3 Long-Run Production Costs

• In the long-run production, all inputs become variable
• All factors of production can be changed in the long run.
• Firms can increase or decrease production capacity
• The long-run allows sufficient time for all inputs to adjust.
• What happens to average costs as production increases under economies of scale?

  Decrease
• Diseconomies of scale result in higher average costs
• Constant returns to scale occur when average costs remain constant as production increases.
• Match the production type with its input characteristics:

  Short-Run Production ↔️ Some fixed, some variable

  Long-Run Production ↔️ All variable
• Economies of scale lead to lower average costs as production increases.
• Specialization of labor increases efficiency
• What type of purchasing reduces costs in economies of scale?

  Bulk purchasing
• The formula for average cost per unit is Total Cost divided by Number of Units Produced.
• Diseconomies of scale occur when the benefits of larger-scale production are outweighed by inefficiencies
• What is one factor contributing to diseconomies of scale?

  Coordination challenges
• In short-run production, some inputs are fixed
• Long-run production involves only variable costs.
• Economies of scale reduce the average cost per unit
• Specialization of labor is a key factor in achieving economies of scale.
• What type of purchasing leads to cost savings in economies of scale?

  Bulk purchasing
• What are economies of scale?

  Cost advantages from increased production
• One factor contributing to economies of scale is the specialization of labor
• Bulk purchasing is a factor contributing to economies of scale.
• What is the formula for average cost per unit?

  \frac{\text{Total Cost}}{\text{Number of Units Produced}}</latex>
• What are some factors contributing to diseconomies of scale?

  Coordination challenges, management difficulties
• The average cost per unit formula remains the same for both economies of scale and diseconomies of scale.
• What happens to average costs in constant returns to scale?

  They remain stable
• In constant returns to scale, the LRATC curve is flat
• How do economies of scale affect average costs?

  Decrease them
• Diseconomies of scale lead to higher average costs as production increases.
• What type of returns to scale is associated with a flat LRATC curve?

  Constant
• The average cost remains constant as production volume changes in constant returns to scale.
• Efficiency in constant returns to scale refers to the optimal use of resources
• What happens to average costs in economies of scale as production increases?

  Decrease
• Average costs increase in diseconomies of scale as production increases.
• Constant returns to scale occur when increasing all inputs by a certain percentage results in an equal percentage increase in output
• What does the Long-Run Average Cost (LRAC) Curve show?

  Minimum average cost
• Order the phases of the LRAC curve based on its shape

  1️⃣ Downward sloping (Economies of Scale)

  2️⃣ Flat (Constant Returns to Scale)

  3️⃣ Upward sloping (Diseconomies of Scale)
• Specialization and technology are factors that contribute to economies of scale.
• In constant returns to scale, efficient resource use leads to stable average costs
• What are coordination and management issues contributing factors to?

  Diseconomies of scale