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AP® Microeconomics · Unit 3 · Topic 3.3

Long-Run Production Costs: Revision Notes (Microeconomics 3.3)

One-page recap of long-run costs: all costs variable, returns to scale, the three regions of the LRATC curve, minimum efficient scale and market concentration, with the mistakes that cost marks.

Short on time? This page is the recap. For explanations, graphs and worked examples, use the full study guide.

Recap

  • The long run is a period long enough to change all inputs, including plant size. There are no fixed costs: all costs are variable.
  • Returns to scale compare the percentage change in output with an equal percentage change in all inputs.
  • The LRATC curve shows the lowest average cost for each output when the firm can choose any plant size. It touches each SRATC curve at one point and lies below the rest of it.
  • Economies of scale (LRATC falls) come from specialisation, spreading large indivisible costs, large-scale technology and bulk buying.
  • Diseconomies of scale (LRATC rises) come from coordination, communication and monitoring problems in very large firms.
  • The minimum efficient scale (MES) is the smallest output at which LRATC is at its minimum.

Key relationships

Relationship How to use it
LRATC = LRTC ÷ Q Calculate for each scale in a table
% change in output > % change in all inputs increasing returns to scale → LRATC falls (if input prices are constant)
% change in output = % change in all inputs constant returns to scale → LRATC flat
% change in output < % change in all inputs decreasing returns to scale → LRATC rises
Market quantity ÷ MES Roughly how many firms can each reach the lowest cost
Change Effect on the graph
Firm grows to a larger output movement along LRATC
Input prices rise at every scale LRATC shifts up
Better technology lowers cost at every scale LRATC shifts down

Assumptions behind the model

  • The firm chooses the cheapest plant size for each output.
  • When linking returns to scale to LRATC, input prices do not change as the firm grows.

Mistakes to avoid

  1. Saying a firm has fixed costs in the long run.
  2. Confusing diseconomies of scale (long run, all inputs vary) with diminishing marginal returns (short run, one input fixed).
  3. Comparing changes in output with changes in inputs as amounts, not percentages.
  4. Giving the MES as any point on a flat bottom, instead of the smallest output there.
  5. Calling a rise in input prices a diseconomy of scale: it shifts the curve.
  6. Unlabelled LRATC graphs: name both axes, the curve, the three regions and the MES.

Quick self-check

  1. All inputs rise by 40% and output rises by 25%. What are the returns to scale? (Decreasing, because 25% < 40%.)
  2. LRATC is $8 at 100 units, $6 at 200, $6 at 300 and $7 at 400. What is the MES? (200 units.)
  3. The MES is 50,000 units and market quantity is 60,000 units. Many firms or few? (Few: only one firm can reach the MES.)

Next: practice questions.

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