Long Run Costs year 2 micro (5)

Long Run

When all factors of production are variable (can increase any CELL), when they do so it is called Scale (scaling up). LR is the returns to scale (What is the change in output when we increase FOP)

Long Run more

Long Run consists of lots of Short runs, initially business is confined by fixed FOP but then they can increase, but then confined again and its same thing again and again.

LRAC Curve Stage 1

Increasing returns to scale because as we increase the input of FOP, they get more out then in. % change of output > % change of input. Costs are rising but output is rising further therefore AC is decreasing.

LRAC Curve Stage 2

% Change of output = % change of input

LRAC Curve Stage 3

Opposite, % change of output < % change of input. Business increasing input (FOP) but getting less in return so AC increases.

Why do business experience Increase and decreasing return of scale?

Economies of Scale at stage 1, or Diseconomies of scale at stage 3.

Minimum Efficient Scale (MES)

Stage 1 at Q*. Its the lowest level of output required to exploit full economies of scale, after this no more economies of scale (cost cant get any lower than this)