3.3

Long-Run Production Costs

AP Microeconomics

Long Run: All Inputs Variable

Returns to Scale

Economies of Scale

Diseconomies of Scale

The LRATC Curve

1234567891011121234567891011121314QuantityCost ($)Min efficient scaleLRATCSRATC₁ (small)SRATC₂ (medium)SRATC₃ (large)

LRATC is the envelope of all SRATC curves — the firm chooses the optimal plant size for each Q

Minimum Efficient Scale (MES)

Natural Monopoly

123456789101112123456789101112131415161718192021222324QuantityCost ($)Still declining at market QLRATCD (Market)

Natural monopoly: LRATC falls across the full range of market demand

Long-Run Adjustment

Connecting Short Run and Long Run

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Unit 3 topics

Unit 3 overview3.1The Production Function3.2Short-Run Production Costs3.3Long-Run Production Costs3.4Types of Profit3.5Profit Maximization3.6Firms' Short-Run Decisions to Produce and Long-Run Decisions to Enter or Exit3.7Perfect Competition3.8Long-Run Equilibrium and Efficiency in Perfect Competition
← Previous3.2 Short-Run Production CostsNext →3.4 Types of Profit
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