Principles of Microeconomics / Unit 6 MIC 0538 worked example, 60 to 90 seconds
Reading a Long-Run Average Cost Curve
The idea
Given a long-run average cost curve and an output, classify the region. Where average cost is falling, the firm has economies of scale and would lower its unit cost by growing. Where it is flat, constant returns to scale: size does not matter there. Where it is rising, diseconomies: a smaller firm would beat it. Then find the smallest output at which average cost reaches its minimum, the minimum efficient scale, and compare it with the market's quantity to estimate how many efficient firms fit.
In practice
Worked example: a bottling plant's long-run average cost falls to five dollars a case at ten thousand cases a week, stays at five dollars out to thirty thousand, and rises after that. At six thousand cases the firm has economies of scale; at twenty thousand, constant returns; at forty thousand, diseconomies. Minimum efficient scale is ten thousand cases. If the market buys three hundred thousand cases a week at five dollars, it can hold between ten and thirty efficient firms, depending on where in the flat range each one sits.
Where people slip
Read the curve for the range, not a single point; the flat stretch is what makes the firm count a range rather than a number. And the count is at the minimum-cost price; a market willing to pay more could support smaller, costlier firms for a while, though larger rivals would undercut them.
Your place on the trail
Every lesson rests on earlier ones and opens later ones. Tap any to jump.
Something wrong in this lesson? Flag it