Economies of scale.docx

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University of California - Irvine

I. Economies of scale a. If you increase the quantity of your production, average total cost will decrease b. Who experiences this? i. Small factories who in the long run expand its factory and hire workers; they will enjoy the glory of specialization II. Diseconomies of scale: a. If you increase the scale of your quantity, average total cost will increase b. Who experiences this? i. Large factories who in the long run seek to expand, but this only leads to a factory too large that experiences coordination problems that make It difficult to keep profit up and cost down III. Constant returns of scale: When ATC stays the same even after you change the quantity IV. Low levels of Production = Average total cost is falling because specialization begins (ATC is U-Shaped) V. High levels of production = Average total cost is increasing because specialization is being abused/ exploited already VI. Price = Supply curve VII. Short run supply curve = the marginal cost curve part above AVC and ATC VIII. Supply curve a. A firm’s long run supply curve is where MC is greater than ATC IX. Entry/ Exit: a. The process of entry and exit stop only when ATC and price are equal b. When at zero profit, firms stop entering and exiting c. Zero profit point = ATC = Price d. What is the ideal Price that all firms will/should meet in long run? i. Efficient scale point = profit maximizing point ii. At the minimum average total cost 1. Anything above this level will give other firms incentive to join and profit will decrease and price will decrease 2. Anything below this level will influence firms to leave the market and there will be a lack of quantity produced X. Elasticity: A. The supply curve is the price curve .. the curve is horizontal B. The supply is inelastic, the supply curve will be upward sloping i. Why? 1. Goods may only be supplied in limited quantities a. Ex farmland 2. Different costs a. Market for painters..some painter’s consider their work more valuable C. Long run VS short run a. Long run supply curves tend to be more elastic because firms can enter/ exit in the l
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