Concepts
- Scaling a Business (Building an Empire)
- Long-Run Average Total Cost Curve
- Economies of Scale (Increasing Returns to Scale)
- Growing for Your Own Good
- Diseconomies of Scale (Decreasing Returns to Scale)
- Growing Too Big/Too Fast for Your Own Good
- Constant Returns to Scale
Overview
When observing long-run cost analysis, the question is not “How many tacos should be produced?” It is instead “How many taco shops should be built?” In the long-run there’s enough time to build more taco shops so a business owner needs to consider the scale of operation. Scaling a business means the business is expanding; more taco shops are being built. If another taco shop is built and a firm’s Long-Run Average Total Cost (LRATC) curve goes down, it is experiencing “economies of scale.” It is growing for it’s own good. The driving force behind this increased efficiency is buying in bulk. If another taco shop is built and a firms’s LRATC goes up, it is experiencing “diseconomies of scale.” Simply put, the firm has grown too big or too fast for it’s own good. Management difficulties cause this to occur. If a firm’s LRATC becomes horizontal for any reason, it is experiencing constant returns to scale.
Materials
Lecture
Long-Run Cost Analysis Video
Long-Run Cost Analysis Lecture Video
Quiz
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