Production Cost in the Long Run
In Economics, the long run is not some future date,
but rather it is defined as an extended period of time in which all of the
costs of production are variable. This means that in the long run, all costs
are variable costs. The length of time that is considered to be long term will
be different for different companies, depending on their inputs and costs.
1 -Economies of scale are the
conditions that occur when average costs of production tend to decline as firms
expand their-output. As output increase
the MC decrease and ATC will also decrease
Holding input
prices constant, during the period of economies of scale each successive unit
of production was cheaper to produce than the previous unit.
-Increasing returns to scale when the level of output changes by more than the
level of the increase of the firm's inputs. In this situation the firm 's costs
will increase by a smaller percentage than its output ,so the average cost of
production falls.
-Economies of scale occur when the firm becomes more
efficient as a result of experience, such as:
specialization, Better management, More efficient use
of a plant's equipment, or Better use of by-products.
2-Diseconomies of Scale are the conditions that occur when average costs of
production tend to rise as firms expand their-output. As output increase the Mc increase ATC will also increase . Because it is
difficult of managing large scale.
decreasing returns to scale When the increase in production output is less than
the amount of the increase in inputs. In this case the firm's costs increase by
a larger percentage than its outputs, so its average cost of production rises.
This usually results from the difficulties involved in
managing a large-scale enterprise, from' reaching full capacity and having to
pay overtime labor rates, or needing to incur additional fixed costs such as an
additional facility.
A firm can also experience constant returns
to scale when output changes by the same percentage as the input
factors.
Summery
:-
- Increasing
Return to scale: Ratio of
output > Ratio of input
- Decreasing
Return to scale: Ratio of output <
Ratio of input
- Constant
Return to scale: Ratio of output =
Ratio of input
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