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Finally, the right-hand portion of the long-run average cost curve, running from output level Q 4 to Q 5 , shows a situation where, as the level of output and the scale rises, average costs rise as well. This situation is called diseconomies of scale    . A firm or a factory can grow so large that it becomes very difficult to manage, resulting in unnecessarily high costs as many layers of management try to communicate with workers and with each other, and as failures to communicate lead to disruptions in the flow of work and materials. Not many overly large factories exist in the real world, because with their very high production costs, they are unable to compete for long against plants with lower average costs of production. However, in some planned economies, like the economy of the old Soviet Union, plants that were so large as to be grossly inefficient were able to continue operating for a long time because government economic planners protected them from competition and ensured that they would not make losses.

Diseconomies of scale can also be present across an entire firm, not just a large factory. The leviathan effect can hit firms that become too large to run efficiently, across the entirety of the enterprise. Firms that shrink their operations are often responding to finding itself in the diseconomies region, thus moving back to a lower average cost at a lower output level.

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The size and number of firms in an industry

The shape of the long-run average cost curve has implications for how many firms will compete in an industry, and whether the firms in an industry have many different sizes, or tend to be the same size. For example, say that one million dishwashers are sold every year at a price of $500 each and the long-run average cost curve for dishwashers is shown in [link] (a). In [link] (a), the lowest point of the LRAC curve occurs at a quantity of 10,000 produced. Thus, the market for dishwashers will consist of 100 different manufacturing plants of this same size. If some firms built a plant that produced 5,000 dishwashers per year or 25,000 dishwashers per year, the average costs of production at such plants would be well above $500, and the firms would not be able to compete.

The lrac curve and the size and number of firms

The two graphs show how the LRAC is affected by competition between firms.
(a) Low-cost firms will produce at output level R. When the LRAC curve has a clear minimum point, then any firm producing a different quantity will have higher costs. In this case, a firm producing at a quantity of 10,000 will produce at a lower average cost than a firm producing, say, 5,000 or 20,000 units. (b) Low-cost firms will produce between output levels R and S. When the LRAC curve has a flat bottom, then firms producing at any quantity along this flat bottom can compete. In this case, any firm producing a quantity between 5,000 and 20,000 can compete effectively, although firms producing less than 5,000 or more than 20,000 would face higher average costs and be unable to compete.

Questions & Answers

What is an axiom in economics
Akerivaan Reply
And it examples
Akerivaan
Why is normal indifference curve convex to the origin? In which way does this convexity affect the marginal rate of substitution?
Alwyn Reply
What is Budget constraint
Veena Reply
Budget constraints is when government expenditure is greater than government revenue or when revenue is less than expenditure.
Jeremiah
thanks
fuh
join you to microeconomic
fuh
what is the deferent between quantity demand and quantity demanded
Affoh
what will happen to the budget constraints if the consumer income decline?
Maryam Reply
please what is the relationship between microeconomics and macroeconomics?
Maryam
Accordingly, Microeconomics focuses on the drivers of decision making, as well as the ways in which individuals' decisions affect the overall supply and demand and supply of particular goods and services, in an economy, and in turn their prices. Whereas Macroeconomics is the study of the big picture
Donia
Of the economy (retrieved from Google)
Donia
***quora.com/How-do-microeconomics-and-macroeconomics-interrelate
Donia
when consumer's income decline then purchasing power of consumer decreases .Budget line shifts inward.
Zeeshan
what is a deductive reasoning
tobi Reply
Deductive reasoning makes use of to arrive at the conclusion.That is, the premise must be real and put to rest .
Jeremiah
Deductive statement makes use of facts to arrive at the conclusion.That is ,the premise must be real and put to rest in order to produce the required results.
Jeremiah
what is scarcity
Agegnehu
scarcity is as a result of miss management and poor allocation of resources.
Jeremiah
what is monopoly in economics
Kenneth
price change in case of an inferior good
divya Reply
Search on Google
Harsh
the purchase of an inferior good decreases with increase in income and vice versa
Alwyn
what is frontier
Ebrima Reply
I want the answers
Gideon
What is the difference between microeconomics and macroeconomics?
Krysstel Reply
what is demand
Chidex Reply
demand Is the quantity of goods a consumer is willing and able to produce at a given price and at a particular period of time.
inioluwa
fixed and variable factors of production
muqtaar Reply
James' income declines, and as a result, he buys more spinach. Is spinach an inferior or a normal good? What happens to James' demand curve for spinach?
Alwyn Reply
When the price floor is implemented, the equilibrium quantity will decrease. Is it true or wrong?
naim Reply
it's true
Nathaniel
what is elasticity
Chibuzor Reply
calculate the price elasticity of demand for Mr chibuzor (y) using both arc and price elasticity formulae
Chibuzor
The best way to understand elasticity is just looking to your behavior as a consumer. Just think about the basic need like food. We all know without, one end up dying if could not eat for a couple of days. It is a reason we say the demand is inelastic. It's impossible to survive without food.
busywork
On the other hand, the demand for luxury goods is elastic because it's sensitive to price changes as it is possible to survive without such good like expensive car. We say demand for such goods is elastic because as consumers, we have an option of not buying as it's possible to survive without them.
busywork
pls how do u calculate for the opportunity cost of two commodities when giving two commodities in question, and one is measured in tons and the other is measured in units
DBA Reply
what are tge factors that causes change in demand
emy Reply
change in income change in price change in taste and preference
Wahida
Change in price, ,availability of substitutes ,change in consumer preferences, changes in economic situation.
busywork
Qd=f(Y, P ,Ps ,F, T ,W , Pop)
Zeeshan
substitute goods taste preference income
Hermina
income increase and decrease is the most important reason of demand changing
Taufiq
Price variable : price This leads to a same direction change for certain luxury goods, and to an opposite direction change for the ordinary, normal, inferior... that's the remaining types of goods. As a result, the is a movement along the demand curve. We also have non price variables like income,
Jonas
We also have non price variables like income, that increases the willingness to pay of the consumers and thus increase the demande at any price, leading to a shift of the demand curve to the right if income increases or to the left of income decreases. A change in income also leads to
Jonas
A same direction change in demand for the normal good and for the opposite direction change for inferior goods.
Jonas
We also have other non price variables like taste, time horizon,...
Jonas

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Source:  OpenStax, Microeconomics. OpenStax CNX. Aug 03, 2014 Download for free at http://legacy.cnx.org/content/col11627/1.10
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