Problem

Why will firms in most markets be located at or c…

01:48

Problem 28 Hard Difficulty

What shape of a long-run average cost curve illustrates economies of scale, constant returns to scale, and diseconomies of scale?

Answer

In economies of scale, the average cost of production decreases as production increases, in
diseconomies of scale, the average cost of production increases as production increases and in
constant returns to scale, the average cost of production remains same with increase in
production. Now the downward sloping section of LRAC curve shows the economies of scale, the
straight horizontal line in LRAC shows constant returns to scale and upward sloping section
represents diseconomies of scale.

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Principles of Microeconomics for AP® Courses

Chapter 7

Production, Costs and Industry Structure

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Diniz D.

March 15, 2022

What is the difference between economies of scale, constant returns to scale, and diseconomies of scale?

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Video Transcript

So in order to answer this problem, we first have to understand what exactly wrong. Long run average costumes are on the longer an average cost curve is the aggregation of the least expensive average cost curve for any level of output. So if you're confused about that, you know, check out the textbook. But that's the basic definition. And in here, what we're looking at is economies of scale, this economies of scale and constant returns to scale. When does this happen? On the average costume. So let's figure out what exactly economies of scale is. First economies of scale basically says, as your quantity increases, your marginal cost will decrease. So here in this chart here, we can see that quantity is over here, and the cost is here. So as our, um as we move along quantity until this point over here at Q three, the average cost the minimum average cost is continuously decreasing as we increase our quantity. So over here is where we have economies of scale. Economies of scale. Now caution returns to scale is when, as quantity increases, the average cost does not change. The average cost is the same on this happens right here when there is no change in the amount of quantity, it's at the minimum of our longer an average cost group and our Disick Khanum ease of scale illustrates when as our quantity goes up, the average cost actually increases. Um and we have to pay a higher cost per unit. So here we see as the quantity increases the price increases as well. So in this port, over here we have dis economies of scale, though from the left until the middle, we have economies of scale. At the very middle, we have a caution returns to scale and then going from the middle to the right, we have Disick on Ami's of scale.

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