equipment is useful only when the volume of output that the firm can sell
justifies using that equipment. For example, assembly lines which
intensively use expensive robotics are cost-minimizing techniques for
producing cars and trucks only when individual operations are repeated
thousands of times.
- Constant Costs
In Figure 8-1 , the firm’s long-run average costs fall until output reaches
which is known as the firm’s minimum efficient scale It is the
smallest level of output at which LRAC reaches its minimum. The LRAC
curve is then flat over some range of output. With such a flat portion, the
firm encounters constant costs over the relevant range of output, meaning
that the firm’s long-run average costs do not change as its output rises.
Because factor prices are assumed to be fixed, the firm’s output must be
increasing exactly in proportion to the increase in inputs. When this
happens, the constant-cost firm is said to have constant returns.
- Increasing Costs
When the LRAC curve is rising, a long-run expansion in production is
accompanied by a rise in average costs. If factor prices are constant, the
firm’s output must be increasing less than in proportion to the increase in
inputs. When this happens, the increasing-cost firm is said to encounter
long-run decreasing returns. Decreasing returns imply that the firm
suffers some diseconomies of scale.
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