Lesson 3 of 9 · All lessons in this module
- Revenue, economic profit and the MR = MC ruleVideo lesson
- Breakeven, shutdown and exit decisionsVideo lesson
- Short-run and long-run costs: economies and diseconomies of scale
- The four market structures and what defines them
- Monopolistic competition: price, output and the long run
- Oligopoly: kinked demand, Cournot, Stackelberg and price leadershipVideo lesson
- Oligopoly strategy: Nash equilibrium, collusion and the long runVideo lesson
- Identifying market structure: elasticity, concentration ratios and HHI
- Integrated cases: reading a market from the data
Lesson 3 of 9 · 12 min
Short-run and long-run costs: economies and diseconomies of scale
In the long run a firm can choose its plant size, so its long-run average cost curve is the envelope of all short-run curves; where it slopes down there are economies of scale, where it slopes up there are diseconomies.
In short
- Short run: at least one input (plant, equipment, technology) is fixed. Long run: all inputs are variable and firms can enter or exit.
- The long-run average total cost (LRAC) curve is the envelope of the short-run ATC curves: for each output, the lowest cost any plant size can achieve.
- Economies of scale: LRAC falls as output rises (negative slope). Diseconomies of scale: LRAC rises (positive slope). A flat stretch means constant returns.
- The minimum point of LRAC is the minimum efficient scale (MES). Under perfect competition, long-run survival requires operating there.
- Firms with pricing power can survive away from MES, but a cost disadvantage still hurts their competitiveness and investment value.
Unlock this lesson free for 7 days
Create a free account to get 7 days free: every lesson, video and flashcard, and the question bank. No card needed.