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Understanding Long-Run Costs in Microeconomics

Explore the differences between short-run and long-run costs, economies of scale, returns to scale, and the impact of sunk costs in microeconomics. Learn the factors influencing a firm's costs in various production scenarios.

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Understanding Long-Run Costs in Microeconomics

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  1. Module Micro: Econ: 20 56 Long Run Costs • KRUGMAN'S • MICROECONOMICS for AP* Margaret Ray and David Anderson

  2. What you will learnin thisModule: • Why a firm’s costs differ in the short run versus the long run. • How a firm can enjoy economies of scale.

  3. Returns to Scale The long-run average cost curve for a firm is “U- shaped” like the short-run average cost curves – but for a different reason.

  4. Short-run versus Long-run Costs • The short run: at least one input is fixed (can not be changed) • The long-run: all inputs are variable

  5. Economies and Diseconomies of Scale • Economies of Scale: the LRATC is falling as the firm expands. • Diseconomies of Scale: the LRATC is rising as the firm expands.

  6. Sunk Costs • A sunk cost is a cost that has been incurred in the past and cannot be recovered. • Sunk costs don’t matter in decision-making!

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