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AP Economics

This module delves into the differences between long-run and short-run costs in economics, highlighting how firms can adjust fixed costs in the long run to minimize average total cost (ATC). The Long Run Average Total Cost (LRATC) curve is U-shaped, illustrating economies and diseconomies of scale. Firms operate on short-run cost curves based on current fixed costs, adjusting as output changes. Key factors include specialization, bulk discounts, and the implications of sunk costs in decision-making.

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AP Economics

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  1. AP Economics Mr. Bernstein Module 56: Long Run Costs November 11, 2013

  2. AP EconomicsMr. Bernstein Long Run Costs versus Short Run Costs • In the Long Run, firms can change Fixed Costs • The LRATC is U-shaped • Fixed cost is chosen to minimize ATC for each level of output

  3. AP EconomicsMr. Bernstein Long Run Costs versus Short Run Costs • Firms find themselves on Short Run cost curves corresponding to current level of fixed cost, and move along that curve when output is changed • But in reality many possible Short Run cost curves are possible, each with its own level of fixed cost • Over Long Run, firms adjust Fixed Costs based on expectations of future output • LRATC is equivalent to a series of snapshots of a firm, taken after adjustments to fixed costs

  4. AP EconomicsMr. Bernstein Economies of Scale • LRATC is falling as output increases • Specialization • High Setup Costs spreading out • Bulk resource purchase discounts • Diseconomies of scale also exist • LRATC rises as output increases • Increasing costs of management and coordination in large, complex organizations

  5. AP EconomicsMr. Bernstein Sunk costs • Money has been spent and cannot be recovered • Does not impact marginal values • Does not factor in decision-making

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