# 7.3 The structure of costs in the long run  (Page 3/26)

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[link] illustrates the idea of economies of scale, showing the average cost of producing an alarm clock falling as the quantity of output rises. For a small-sized factory like S, with an output level of 1,000, the average cost of production is $12 per alarm clock. For a medium-sized factory like M, with an output level of 2,000, the average cost of production falls to$8 per alarm clock. For a large factory like L, with an output of 5,000, the average cost of production declines still further to \$4 per alarm clock.

The average cost curve in [link] may appear similar to the average cost curves presented earlier in this chapter, although it is downward-sloping rather than U-shaped. But there is one major difference. The economies of scale curve is a long-run average cost curve, because it allows all factors of production to change. The short-run average cost curves presented earlier in this chapter assumed the existence of fixed costs, and only variable costs were allowed to change.

One prominent example of economies of scale occurs in the chemical industry. Chemical plants have a lot of pipes. The cost of the materials for producing a pipe is related to the circumference of the pipe and its length. However, the volume of chemicals that can flow through a pipe is determined by the cross-section area of the pipe. The calculations in [link] show that a pipe which uses twice as much material to make (as shown by the circumference of the pipe doubling) can actually carry four times the volume of chemicals because the cross-section area of the pipe rises by a factor of four (as shown in the Area column).

Comparing pipes: economies of scale in the chemical industry
Circumference ( $2\pi r$ ) Area ( $\pi {r}^{2}$ )
4-inch pipe 12.5 inches 12.5 square inches
8-inch pipe 25.1 inches 50.2 square inches
16-inch pipe 50.2 inches 201.1 square inches

A doubling of the cost of producing the pipe allows the chemical firm to process four times as much material. This pattern is a major reason for economies of scale in chemical production, which uses a large quantity of pipes. Of course, economies of scale in a chemical plant are more complex than this simple calculation suggests. But the chemical engineers who design these plants have long used what they call the “six-tenths rule,” a rule of thumb which holds that increasing the quantity produced in a chemical plant by a certain percentage will increase total cost by only six-tenths as much.

## Shapes of long-run average cost curves

While in the short run firms are limited to operating on a single average cost curve (corresponding to the level of fixed costs they have chosen), in the long run when all costs are variable, they can choose to operate on any average cost curve. Thus, the long-run average cost (LRAC) curve    is actually based on a group of short-run average cost (SRAC) curves , each of which represents one specific level of fixed costs. More precisely, the long-run average cost curve will be the least expensive average cost curve for any level of output. [link] shows how the long-run average cost curve is built from a group of short-run average cost curves. Five short-run-average cost curves appear on the diagram. Each SRAC curve represents a different level of fixed costs. For example, you can imagine SRAC 1 as a small factory, SRAC 2 as a medium factory, SRAC 3 as a large factory, and SRAC 4 and SRAC 5 as very large and ultra-large. Although this diagram shows only five SRAC curves, presumably there are an infinite number of other SRAC curves between the ones that are shown. This family of short-run average cost curves can be thought of as representing different choices for a firm that is planning its level of investment in fixed cost physical capital—knowing that different choices about capital investment in the present will cause it to end up with different short-run average cost curves in the future.

#### Questions & Answers

how environment affect demand and supply of commodity ?
Wht at the criteria for market ?
Amos
what is difference between monitory policy and fiscal policy?
monetary policy is a policy thrust by National Govt(CBN) to influence government spending, purchase &taxes
Frank
necessity of economics
I will say want,choice,opportunity cost,scarcity,scale of preference
Alao
what is monopoly market.How price output are determined under monopoly market
bisham
b) Monopoly market is an impecfect market where s single firm having the innovation to produce a particular commodity.Prices are determined through output since there are no other competitive.
Frank
Monopoly market:firm has market power & does not respond to market price
Frank
Explain the process of price determination under perfect competition market with suitable diagram
Price determination under perfect competition via this process :firms have no market power to influence price rather firms respond to market price.
Frank
price is different from demand- demand is amount of commodity
demand is amount /quantity of commodity a potential buyer is willing to buy at a given price at market
Frank
demand is a desire of customer on commodity with the ability to pay it and willing to buy it at given price of commodity
Harika
demand is price of what
show that shortrun average cost
what is economics
what is money
Mbah
what is money
Mbah
Difine macro economics
agaba
money is a medium of exchange between goods and services,maybe inform of currency.
Wesonga
Economics is study of how human beings strive to satisfy numerous wants using limited available resources.
Wesonga
how do you find the maximum number of workers the firms should employ order to produce where there are increasing returns
Jane
what are implications of computing national income?.
agaba
pl
MUDASIRU
what is the formulae for calculating national income
MUDASIRU
it calculated by value added method
Praveen
classify the production units like agriculture, banking, transport etc
Praveen
money is anything that is generally acceptetable for human
Ogbaji
Estimate the net value added(NVA) at fixed cost by each industrial structure
Praveen
definition of unemployment
what are the causes of unemployment?
The main causes of unemployment are listed below. 1. Frictional unemployment 2. Cyclical unemployment 3. Structural unemployment
assani
We can also categorize the causes on a broader sense as: 1. Political and 2. Social cause As unemployeement root causes are embaded in this two.
Yonathan
would opportunity cost exist if there was no scarcity?
assani
yes just because the opportunity cost arose when there is Alternative to choose among the alternatives.
I am thinking that, if our resources were unlimited, then there wouldn't be any need to forgo some wants. Hence the inexistence if opportunity cost
assani
Politics
Job
politics has done what?
assani
consider time assani
Mary
I'm Emmanuel,...I taught the main cause is the change in gov't.
Emmanuel
...Lack of capital to set up a firm respectively
Emmanuel
🙈
Emmanuel
I would like to bring in Educational levels can also be the cause the cause of the problem respectively
Emmanuel
I think the main causes of unemployment is lack of INFRASTRUCTURAL DEVELOPMENT OVER POPULATION OVER DEPENDENT ON GOVERNMENT LACK OF SELF EMPOWERMENT...
ananti
lack of skills among the new generation is the serious issue.
Vishal
Where I come from , I don't see why education or personal aspects seem to do with unimployment, technically the motivation and eigerness in all works of live is there , dispite the cultural influence and physical bearriors;the thing we lacking is Government Support and open market ethics.
Joe
sorry about that-(repation). We have a over powering ethical political system that's displacing the marketing asspects of economy and causing large scale unemployment right across the board...
Joe
can someone Explain Expansionary Monetary Policy and Contractionary Monetary Policy Using one of the instrument of Monetary Policy? Please am kinda lost here?. ta
using a graph show the case of substitute and compliment goods
can anyone give me a simple explanation to Five Sector Macroeconomics?
Emmanuel
Can someone please define what economics is
economics simply is a social science subject that study human behavior.
dajan
economics is a social science which studies human behaviour as a relationship between ends and scarce means that has alternative uses
Alao
Can someone please tell me how to calculate GDP
Emmanuel
emmanual kapal to calculate GDP (Gross Domestic Product) has three method in calculating it (1)income approach (2) expenditure approach (3) value added method
Alao
thanks Alae
Emmanuel
u are welcome
Alao
in basic terms economics is revered to as battery system, it date back to when Men sees the need to exchange sapless goods and produce to gain , either wealth , basic necessities or to establish trading ties for personal benefit or social asspects in terms of coexistence and continuity, future .
Joe
what is the law of demand
keep other thing constant, when the price increases demand decrease when the price decreases demand increases of the commodity.
sj
all things being equal,quantity demanded decrease as price increase and increase as price decrease
Seth
there's practial joke to it ..." the higher the demand ; scarcity, increase in production and drop in quality"... quite the controversy - for example China vs Europe, United States and we are all boxed up in between somewhere...
Joe
Other thing remain constant the low price of commodity the high quantity of commodity and vice versa is true
Baraka
Explain Effective demand
What is effective demand
Anita
like Modi is in demand...best example of effective demand
Pranav
Don't get you
Anita
Anita you mean you don't get me or who?
Onyeking
level of demand that represents a real intention to purchase by people with the means to pay
Pranav