Economics Micro & Macro (CliffsAP)

It is also important to realize that average total cost curves can take different shapes. In Figures 9-7 and 9-8, the average
total cost curve is shown with different returns to scale. Notice the shape of the curve.

Figure 9-7

In Figure 9-7, the long-run average total cost curve has a longer period of economies to scale than diseconomies to
scale. This curve would represent a firm that is lowering its costs rapidly as units are being increased.

Figure 9-8

In Figure 9-8, the firm has a shorter period of economies of scale and steeper diseconomies of scale.

Reasons for Economies of Scale

It is important for a firm to specialize as it grows larger because specialization improves the firm’s chances of realizing
economies of scale. Economies of scale may also result from the use of larger machines that are more efficient than
smaller ones. Larger machines can produce in mass quantity and sometimes use less power or fuel than a smaller ma-
chine while creating the same number of units. Large electrical power generators are more efficient than smaller ones
because they provide more output per quantity of resource.

Size does not automatically improve efficiency. The specialization that comes with large size often requires the addition
of specialized managers. Each level of supervision requires additional labor inputs, and before you know it, your costs
are soaring. A firm can achieve economies of scale by increasing quantities of output while keeping costs at a minimum.

The long run is referred to as a planning horizon because the firm has not committed to a fixed quantity of any resources
and has all options available to it. In determining the size or scale to select, the firm must look at expected demand and
expected costs of production, and then select the size that appears to be most profitable.

Here are two key points to remember:

■ The long-run average total cost curve is U-shaped because of economies and diseconomies of scale. Short-run

cost curves get their U shape from diminishing marginal returns.

■ Economies of scale can result from technology and specialization. Diseconomies of scale may occur because of

coordination and communication problems that result from the firm’s growth.

Output

ATC

Average Total Costs

Output

ATC

Average Total Costs

Part III: Microeconomics