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Business Administration
Business Administration 3321K
Tom Haffie

Principles of Economics Longrun Competitive EquilibriumLONGRUN COST Recall that all factors particularly capital are variable in the longrunThere are two ways plus combinations of the two ways that Capital can change in the longrun1Change in the size of individual firms through additional or improved equipment and buildings or through reduction or depreciation of equipment and buildings2Entry into or exit from the industry by firms of the same size as existing firmsEconomies of ScaleWe analyze the effect of changes in the size of individual firm capital through the concept of economies of scaleDefinitionEconomies of Scale Increasing Returns to Scale occur when aincrease in all factor inputs causes a greaterincrease in output EgSuppose that 5 units of Labour and 3 units of Capital produce 100 units of output but that 10 units of Labour and 6 units of Capital produce 250 units of output 100 increase in factor inputs produces a 150 increase in outputWhy does the concept of Economies of Scale not contradict Eventually Diminishing Returns MPDefinition Diseconomies of Scale Decreasing Returns to Scale occurs when aincrease in all factors causes a smallerincrease in outputDefinition Constant Returns to Scale occurs when aincrease in all factors causes the sameincrease in output Average Cost decreases with Economies of ScaleThe key element of economies of scale is a decrease in Average Cost with increases in output 1
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