Costs and the Scale of Operation

1
Costs and the Scale of Operation
2
From the Short Run to the Long Run
LRMC
Price
SRMC
LRAC
SRAC
Quantity
3
From the Short Run to the Long Run
LRMC
Price
1
LRAC
2
Quantity
4
From the Short Run to the Long Run
LRMC
Price
1
LRAC
4
2
3
Quantity
5
The Long Run
LRMC
Price
LRAC
Quantity
6
Economies of Scale
LRMC
Price
Diseconomies of Scale
Economies of Scale
LRAC
Constant Returns To Scale
Quantity
7
More Long Run Cost Curves
Diseconomies of Scale
Price
Economies of Scale
Constant Returns To Scale
Quantity
8
Long Run Costs
Diseconomies of Scale
Price
Economies of Scale
How does a Multiplant Operation fit into this
scheme?
Constant Returns To Scale
Quantity
9
More Long Run Cost CurvesSome Empirical
Observations
Where do we observe firms operating?
Price
LRAC
Quantity
10
Minimum Efficient Scale
Price
LRAC
Quantity
11
Minimum Efficient Scale

• Defined Output level at which long run average
  costs are minimized
• What does this say about the scale of firm
  operations?
• What does this say about the size of firms?
• What does this say about the entry of firms into
  a market?
• How does market demand figure into this?

12
Economies of Other Types

• Economies of Scope
• Impact on costs of production when related or
  complementary goods are produced
• Declining costs of adding new product lines
• Examples Passenger air travel and Package
  services
• Trading on Brand Names
• Accounting firms Auditing and Consulting

13
Estimating Cost Relationships

• What period is under consideration?
• Short run vs. Long run
• Measurement problems valuation of inputs
  (assets)
• Estimation Procedures Regression techniques
• Functional Form
• Alternatives