Average Total Cost

Last Updated: 08 May 2020
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In the long-run, the production can increase itself when all factors of production are increased. When total production (Q) is doubled when all the factors are doubled, the attribution of production is constant. When total production (Q) is doubled when all the factors are increased at half ('L), the attribution of production is increased. When total production (Q) is doubled when the all factors are multiplied by 4, the attribution of production is decreased. Naturally when the output of production is increased, the cost of production is decreased.

The enterprise has interest to use a technology that allows increasing attribute. This is possible in certain cases, that is to say, when the technology allows it. Long Run Cost In the long run, costs are all variable. This means that even capital can be altered. Output can be changed by changing both capital and labor. We say that changing the amount of capital that a producer uses is changing its "scale" By changing scale in the long run, a firm can pick which short run average total cost curve it wants to have.

If we drew all of the short run average total cost curves that a producer could select between, and then draw another curve containing all of these, the new curve is called the long run average total cost curve: The long run average total cost curve slopes down (indicating lower average costs) if the scale is increased from a very small scale to a little larger scale. These declining average costs as scale is increased are called "economies of scale" or "increasing returns to scale. " As output and scale are increased, a point is reached at which greater scale no longer decreases average costs.

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This begins the range of output for which we say there are "constant returns to scale;" average costs neither rise nor fall as scale is increased. Eventually, larger scale will lead to average costs getting larger. This is referred to as "diseconomies of scale," or "decreasing returns to scale. " In the long run, if a seller is a price taker, it will probably choose to pick one of the (short run) average total cost curves that will put it in the range of constant returns, since these cost curves involve the lowest average total cost, and thus the greatest chance of earning a profit in the short run, no matter what the price is.

In the long run, every seller will be doing this: Conclusion for Long Run: The long-run average total cost curve envelopes the set of U-shaped short-run average total cost curves corresponding to different plant sizes. In the long run, a firm can select the optimal plant size for the quantity it wishes to produce. The firm selects the plant size that gives the lowest average total cost. If there are only a few plant sizes to choose from, the long-run average total cost curve will be scalloped. As the number of possible plant sizes increases, the long-run average total cost curve becomes smooth.

To reduce the Average Total Cost in the Long-Run we must reduce all the costs and these variable costs are not only Labour and Raw Materials but all the factors. In the long-Run you can change all the factors (Capital, labour, R,M,.. ) Generally if a company wants to reduce costs, then it must: Increase its productivity. Find lower prices for Raw materials. Reduce Fixed cost (maybe can fire the useless managers or other useless employees). Outsourcing (other companies produce/do something for you i. e Nike in Bulgaria). Make Off-shoring (to change the location of your firm/company to somewhere else that is cheaper e. t. c).


David Begg, Stanley Fischer ; Rudiger Dornbusch, 2008. Economics, 9th edition. McGraw-Hill, Higher Education Theory of production. (2008). In Encyclop? dia Britannica. Retrieved November 12, 2008, from Encyclop? dia Britannica Online: http://www. britannica. com/EBchecked/topic/477991/theory-of-production Robert Schenk, The Production Function, http://ingrimayne. com/econ/TheFirm/ProductionFunct. html Geoff Riley, Eton College, September 2006, Markets ; Market Systems: http://tutor2u. net/economics/revision-notes/a2-micro-shortrun-longrun-production. html

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