This document provides a summary of key concepts related to costs of production in the short run and long run from Mankiw Chapter 13. It discusses: 1) Short run costs include fixed costs for inputs like factories, while long run all costs are variable as firms can build or sell factories. 2) Long run average total cost (LRATC) is the most efficient cost per unit using optimal input mix and factory size for a given quantity. LRATC looks like a stepped curve made up of individual short run average total cost curves for different factory sizes. 3) Economies of scale occur when average total cost falls as quantity increases due to specialization, while diseconomies of scale are due to

1. Bellringer
Mankiw Ch 13
1. Consider some of your short term goals (within
1 year)
2. Consider some of your long term goals (when
you get to be old like Klein)
3. How are marginal costs different for an MP3 or
smart phone app than airline travel or
manufacturing?

2. Which curves are MR, AFC, AVC, ATC?

3. Short run Fixed costs
• Factory in long run?
• Over years, all costs are variable

4. Costs in the Short Run & Long
Run
• Short run:
Some inputs are fixed (e.g., factories, land).
The costs of these inputs are FC.
• Long run:
All inputs are variable
(e.g., firms can build more factories, or sell existing
ones).
• In the long run, ATC at any Q is cost per unit using
the most efficient mix of inputs for that Q (e.g., the
factory size with the lowest ATC).
THE COSTS OF PRODUCTION
4

5. EXAMPLE 3: LRATC with 3 factory Sizes
Firm can choose
from 3 factory
sizes: S, M, L.
Each size has its
own SRATC curve.
Avg
Total
Cost
The firm can
change to a
different factory
size in the long
run, but not in the
short run.
THE COSTS OF PRODUCTION
ATCS
ATCM
ATCL
Q
5

6. EXAMPLE 3: LRATC with 3 factory Sizes
To produce less
than QA, firm will
choose size S
in the long run.
Avg
Total
Cost
ATCS
ATCM
To produce
between QA
and QB, firm will
choose size M
in the long run.
To produce more
than QB, firm will
choose size L
in the long run.
THE COSTS OF PRODUCTION
ATCL
LRATC
QA
QB
Q
6

7. A Typical LRATC Curve
In the real world,
factories come in
many sizes,
each with its own
SRATC curve.
ATC
LRATC
So a typical
LRATC curve
looks like this:
Q
THE COSTS OF PRODUCTION
7

8. How ATC Changes as
the Scale of Production Changes
Economies of
scale: ATC falls
as Q increases.
ATC
LRATC
Constant returns
to scale: ATC
stays the same
as Q increases.
Diseconomies of
scale: ATC rises
as Q increases.
THE COSTS OF PRODUCTION
Q
8

9. Economies of Scale Causes
• Economies of scale occur when increasing production
allows greater specialization
• More common when Q is low.
• Capital goods (machinery)
• Specialization of labor (& movement of labor)
• Transportation or research network
THE COSTS OF PRODUCTION
9

11. Are economies of scale positive for
consumers?
• In your groups, brainstorm 2 reasons why
they are positive
• 2 reasons why they are negative (think about
small business competition)

12. Diseconomies of Scale Causes
Diseconomies of scale are due to coordination problems
in large organizations.
More common when Q is high.
THE COSTS OF PRODUCTION
12

13. According to the figure, suppose the firm currently operates on the
minimum of ATCB. If it increases production, but not all the way to N,
then short-run average total cost
a. and long-run average total cost increase.
b. and long-run average total cost decrease.
c. rises and long-run average total cost is unchanged.
d. is unchanged and long-run average total cost increases.

14. According to the figure, suppose the firm currently operates on the
minimum of ATCA, if the firm continues to produce until M, they would
benefit from:
a. diseconomies of scale
b. economies of scale
c. constant returns to scale
d. short run cost increases

15. Mankiw Page 276-277
• #12, #9, #7, #5