Lesson 3 of 8 · 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.
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