ap economics: module 56 terms

t or f: in the LR, FC stays the same as it did in the SR

f; becomes a variable cost and can change

relationship between FC and VC

trade-off; high FC and low VC or vice-versa

how does a firm know what FC they should have?

when a firm has a desired output level it expects to maintain over time, it should choose the optimal FC for that level to minimize ATC

long-run average total cost curve (LRATC)

shows the relationship between output and ATC when FC has been chosen to minimize ATC for each level of output

• if there are many choices for FC → LRATC is a U shape

when is a firm on its LRATC or SRATC?

when optimal FC for a level of output is chosen → LRATC

• once output level alters → SRATC

• needs to readjust FC for new level in order to go back to LRATC

SRATC curves that minimize ATC @ some level of output will be where relative to the LRATC?

they will touch the LRATC at that same level of output

what determines the slope of the LRATC?

the influence of scale on its LRATC of production

scale

the size of a firm’s operations

economies of scale

when LRATC declines as output increases

• can result from increasing returns to scale

increasing returns to scale

when output increases more than in proportion to an increase in all inputs

minimum efficient scale

the smallest quantity at which a firm’s LRATC is minimized

• happens when economies of scale end and diseconomies of scale start

diseconomies of scale

when LRATC increases as output increases

• can result from decreasing returns to scale

decreasing returns to scale

when output increases less than in proportion to an increase in all inputs

constant returns to scale

when output increases directly in proportion to an increase in all inputs

what explains scale effects?

technology of production

• economies of scale:

  • specialization that comes w/ a large scale of production → efficiency

  • large initial setup cost

• diseconomies of scale

  • usually in large firms due to lack of communication and coordination

IMPORTANT INFO

economies of scale induce firms to grow, but diseconomies of scale limit their size

sunk cost

a cost that has already been incurred and is nonrecoverable; a cost that should be ignored in a decision about future actions

• no influence on future costs and benefits