Types of long-term costs. The firm's costs in the long run

The firm's costs in the long run

In the long-term (long-term) period, all factors of production are variable, so the company strives to organize production at the “required scale”, ensuring production with minimal long-term average total costs (LATC - longtime average total cost).

Long-Run Average Cost Curve- a curve that envelops an infinite number of short-term average total production cost curves that touch it at their minimum points. The LATC average long-term cost curve is formed on the basis of short-term cost curves for different production volumes (Fig. 8.3.1). The long-run average cost curve shows the lowest cost per unit of production at which any level of output can be achieved, provided that the firm has time to change all factors of production.

Three segments can be distinguished on the LATC curve (Fig. 8.3.2). In the first of them, long-term average costs are reduced, in the third, on the contrary, they increase. In the second intermediate segment, approximately the same level of costs per unit of production is observed at different meanings volume of production. The arcuate nature of the long-term average cost curve (the presence of decreasing and increasing sections) is explained by the effects of scale of production.

Rice. 8.3.1. Long-Run Average Cost Curve

Rice. 8.3.2. Average costs of a firm in the long run

Positive economies of scale occur when a firm's long-run average costs fall as output increases. Positive economies of scale- this is a significant decrease in the average production costs of the company as production increases. The manifestation of this effect is facilitated by the specialization of resources and the division of labor, which increases the productivity of all factors, the improvement of technology, production automation, management specialization, etc. Diseconomies of scale occurs when long-run average costs rise faster than output. It may be due to the fact that as the company expands, the bureaucratization of management personnel increases and, as a result, production efficiency gradually decreases. In the case where an increase in the scale of production does not affect the level of long-term average costs, we speak of permanent effect scale of production. Constant economies of scale occurs if the firm's long-term average costs do not depend on changes in the volume of output

As follows from Figure 8.3.1., with production volume Q 2, the long-term average cost curve LATC reaches a minimum. This value corresponds to the scale of production at which the highest savings are achieved. Minimum efficient scale of production– smallest size enterprise that allows the firm to minimize its long-run average costs.

The minimum efficient scale of production, in turn, determines the maximum possible number of efficiently operating firms required to satisfy the demand for a particular product. If the minimum efficient scale of production is equal to the entire value market demand(Q D), then the market will be monopolized by one large firm (natural monopolist) (Fig. 8.3.3). If it is several times less than the demand, then there will be several medium-sized firms on the market. If the minimum efficient scale of production is incomparably small in relation to the size of market demand, then many small firms will operate in the market.

The main feature of costs in the long run is the fact that they are all variable in nature - the firm can increase or reduce capacity, and it also has enough time to decide to leave a given market or enter it by moving from another industry. Therefore, in the long term, average constants and averages are not distinguished. variable costs, but analyze the average cost per unit of production (LATC), which in essence is also the average variable cost.

To illustrate the situation with costs in the long run, consider conditional example. Some enterprise for quite a long time long period expanded over time, increasing the volume of its production. The process of expanding the scale of activity will be conditionally divided into three short-term stages within the analyzed long-term period, each of which corresponds to different enterprise sizes and volumes of output. For each of the three short-term periods, short-term average cost curves can be constructed for different enterprise sizes - ATC 1, ATC 2 and ATC 3. The general average cost curve for any volume of production will be a line consisting of external parts all three parabolas - graphs of short-term average costs.

In the example considered, we used a situation with a 3-stage expansion of the enterprise. A similar situation can be assumed not for 3, but for 10, 50, 100, etc. short-term periods within a given long-term period. Moreover, for each of them you can draw the corresponding ATS graphs. That is, we will actually get a lot of parabolas, a large set of which will lead to the alignment of the outer line of the average cost graph, and it will turn into a smooth curve - LATC. Thus, long-run average cost (LATC) curve represents a curve that envelops an infinite number of short-term average production cost curves that touch it at their minimum points. The long-run average cost curve shows the lowest cost per unit of production at which any level of output can be achieved, provided that the firm has time to change all factors of production.

In the long run there are also marginal costs. Long Run Marginal Cost (LMC) show the change in the total amount of costs of the enterprise due to a change in output volume finished products per unit when the firm is free to change all types of costs.

The long-run average and marginal cost curves relate to each other in the same way as the short-run cost curves: if LMC lies below LATC, then LATC falls, and if LMC lies above laTC, then laTC rises. The rising portion of the LMC curve intersects the LATC curve at the minimum point.

There are three segments on the LATC curve. In the first of them, long-term average costs are reduced, in the third, on the contrary, they increase. It is also possible that there will be an intermediate segment on the LATC chart with approximately the same level of costs per unit of output at different values of output volume - Q x. The arcuate nature of the long-term average cost curve (the presence of decreasing and increasing sections) can be explained using patterns called positive and negative effects of increased scale of production or simply scale effects.

The positive effect of scale of production (the effect of mass production, economies of scale, increasing returns to scale of production) is associated with a decrease in costs per unit of production as production volumes increase. Increasing returns to scale of production (positive economies of scale) occurs in a situation where output (Q x) grows faster than costs rise, and therefore the enterprise's LATC falls. The existence of a positive effect of scale of production explains the descending nature of the LATS graph in the first segment. This is explained by the expansion of the scale of activity, which entails:

1. Increased labor specialization. Labor specialization presupposes that diverse production responsibilities are divided between different employees. Instead of carrying out several different production operations at the same time, which would be the case with a small-scale enterprise, in conditions of mass production each worker can limit himself to one single function. This results in an increase in labor productivity and, consequently, a reduction in costs per unit of production.

2. Increased specialization of managerial work. As the size of an enterprise grows, the opportunity to take advantage of specialization in management increases, when each manager can focus on one task and perform it more efficiently. This ultimately increases the efficiency of the enterprise and entails a reduction in costs per unit of production.

3. Effective use capital (means of production). The most efficient equipment from a technological point of view is sold in the form of large, expensive kits and requires large production volumes. The use of this equipment by large manufacturers allows them to reduce costs per unit of production. Such equipment is not available to small firms due to low production volumes.

4. Savings from using secondary resources. A large enterprise has more opportunities to produce by-products than a small company. A large firm thus makes more efficient use of the resources involved in production. Hence the lower costs per unit of production.

The positive effect of scale of production in the long run is not unlimited. Over time, the expansion of an enterprise can lead to negative economic consequences, causing a negative effect of scale of production, when the expansion of the volume of a company's activities is associated with an increase in production costs per unit of output. Diseconomies of scale occurs when production costs rise faster than production volume and, therefore, LATC rises as output increases. Over time, an expanding company may encounter negative economic facts caused by the complication of the enterprise management structure - the management floors separating the administrative apparatus and the production process itself are multiplying, top management turns out to be significantly distant from production process at the enterprise. Problems arise related to the exchange and transmission of information, poor coordination of decisions, and bureaucratic red tape. The efficiency of interaction between individual divisions of the company decreases, management flexibility is lost, control over the implementation of decisions made by the company's management becomes more complicated and difficult. As a result, the operating efficiency of the enterprise decreases and average production costs increase. Therefore, when planning its production activities, a company needs to determine the limits of expanding the scale of production.

In practice, cases are possible when the LATC curve is parallel to the x-axis at a certain interval - on the graph of long-term average costs there is an intermediate segment with approximately the same level of costs per unit of output for different values of Q x. Here we are dealing with constant returns to scale of production. Constant returns to scale occurs when costs and output grow at the same rate and, therefore, LATC remains constant at all output levels.

The appearance of the long-term cost curve allows us to draw some conclusions about the optimal size of the enterprise for different industries economy. Minimum effective scale (size) of an enterprise- the level of output from which the effect of savings due to an increase in the scale of production ceases. In other words, we're talking about about such values of Q x at which the company achieves the lowest costs per unit of production. The level of long-term average costs determined by the effect of economies of scale affects the formation of the effective size of the enterprise, which, in turn, affects the structure of the industry. To understand, consider the following three cases.

1. The long-term average cost curve has a long intermediate segment, for which the LATC value corresponds to a certain constant (Figure a). This situation is characterized by a situation where enterprises with production volumes from Q A to Q B have the same cost. This is typical for industries that include enterprises of different sizes, and the level of average production costs for them will be the same. Examples of such industries: wood processing, timber industry, food production, clothing, furniture, textiles, petrochemical products.

2. The LATC curve has a fairly long first (descending) segment, in which there is a positive effect of production scale (Figure b). The minimum cost is achieved with large production volumes (Q c). If the technological features of the production of certain goods give rise to a long-term average cost curve of the described form, then large enterprises will be present in the market for these goods. This is typical, first of all, for capital-intensive industries - metallurgy, mechanical engineering, automotive industry, etc. Significant economies of scale are also observed in the production of standardized products - beer, confectionery and so on.

3. The falling segment of the long-term average costs graph is very insignificant; the negative effect of scale of production quickly begins to work (Figure c). In this situation, the optimal production volume (Q D) is achieved with a small volume of output. If there is a large-capacity market, one can assume the possibility of the existence of many small enterprises producing this type products. This situation is typical for many industries of light and Food Industry. Here we are talking about non-capital-intensive industries - many types retail, farms and so on.

In the long term, all costs act as variables, since during a long-term time interval the volumes of not only constants, but also variable costs. Analysis of a long-term time interval is carried out on the basis of:

· long-term averages
· marginal costs.

Long-run average costs- these are costs per unit of output that can be changed optimally. The peculiarity of changes in long-term average costs is their initial decrease with expansion production capacity and growth in production volume. However, the introduction of large capacities ultimately leads to an increase in long-term average costs. The long-run average cost curve on the graph goes around all possible short-run cost curves, touching each of them, but not crossing them. This curve shows the lowest long-run average cost of producing each level of output when all factors are variable. Each short-run average cost curve corresponds to an enterprise whose size is larger than its predecessor. A change in long-run average costs implies a change in the scale of production. Associated with these changes is the concept of “economies of scale.” Economies of scale can be positive, negative and permanent.

To illustrate the situation with costs in the long run, consider a conditional example. Some enterprise expanded over a fairly long period of time, increasing its production volumes.

The process of expanding the scale of activity will be conditionally divided into three short-term stages within the analyzed long-term period, each of which corresponds to different enterprise sizes and volumes of output.

For each of the three short-term periods, short-term average cost curves can be constructed for different enterprise sizes - ATC1, ATC2 and ATC3. The general average cost curve for any volume of production will be a line consisting of the outer parts of all three parabolas - graphs of short-term average costs.

Moreover, for each of them you can draw the corresponding ATS graphs. That is, we will actually get a lot of parabolas, a large set of which will lead to the alignment of the outer line of the average cost graph, and it will turn into a smooth curve - LATC. Thus, the long-run average cost curve (LATC) is a curve that envelops an infinite number of short-run average cost curves that meet it at their minimum points.

The long-run average cost curve shows the lowest cost per unit of production at which any level of output can be achieved, provided that the firm has time to change all factors of production.

In the long run there are also marginal costs. . Long Run Marginal Cost (LMC) show the change in the total amount of costs of the enterprise in connection with a change in the volume of output of finished products by one unit in the case when the company is free to change all types of costs.

There are three segments on the LATC curve. In the first of them, long-term average costs are reduced, in the third, on the contrary, they increase. It is also possible that there will be an intermediate segment on the LATC chart with approximately the same level of costs per unit of output for different values of output volume - Qx. The arcuate nature of the long-term average cost curve (the presence of decreasing and increasing sections) can be explained using patterns called positive and negative effects of increased scale of production or simply scale effects.

state term period. When planning a long-term expansion or reduction in production volumes, a company cannot limit itself to only increasing or reducing variable costs (the number of workers hired, raw materials used, semi-finished products, etc.). In this case, production efficiency will decrease, since while maintaining unchanged production capacity (fixed costs), the optimal combination of production factors will be disrupted. To increase the profit received, the company strives to reduce average costs, therefore, in the long run, it changes its size as production volumes change. Since this changes the value of fixed costs, the firm, as it were, “transitions” to a new average cost curve (AS).

Like a new curve AC, corresponding to larger firm size
we are located relative to the old curve AC? It depends on the day
actions economies of scale. In Fig. 6.8 shows several options
tov of the firm's short-term average cost curves, corresponding
for different production volumes and different action effect
scale. With increasing returns to scale of production,
a portional increase in all costs leads to a decrease in average
costs (transition from the curve AC 1 To AC 2). With diminishing returns from
scale when production volumes
too large, proportional to the size
eliminating all costs leads to increased

reduction of average costs (transition from the curve AC 3 k LS 4). 1 1/-shaped line L.A.C. enveloping all possible short-term average cost curves, represents the long-term average cost curve: its descending part

Market mechanism perfect competition

The sink corresponds to increasing returns to scale, and the upstream region corresponds to diminishing returns to scale. Whenever its size changes, the firm “moves” to a new short-term curve each time AC and at the same time moves along the long-term curve LAC.

Thus, by changing the amount of all resources involved in production, the firm seeks to optimize its size and minimize long-term average costs.

Let us now consider how the firm's equilibrium changes when the number of firms in the industry changes. Let's look again at Figure 6.6. If market price above average costs (Fig. 6.66) and the firm receives quasi-rent, then in this case new firms, attracted by the opportunity to receive excess profits, will strive to enter this industry. In conditions of perfect competition, there are no significant barriers preventing new firms from entering the industry. Therefore, the supply of products will begin to increase, and as a result, competition between firms leads to a decrease in price and the disappearance of quasi-rent.

When the market situation is unfavorable for a company and the price of its products is below average costs (Fig. b.bv), then the company that finds itself in this situation leaves the market, and the supply of products is reduced. All other things being equal, the price begins to increase until the firm makes a normal profit.

Finally, if the price is equal to the minimum average cost (Fig. 6.6a), then in this case there is no tendency to change the number of firms operating in the industry; this competitive industry is in a state of complete long-term equilibrium, the condition of which can be written as follows:

MS = P = AC = LAC

Graphically, the equilibrium condition of a competitive firm in the long run is shown in Fig. 6.9.

We can conclude that under conditions of perfect competition in the long run, economic efficiency is achieved both in terms of the use of limited resources in this process production, and in terms of their distribution between various production processes.

On the one hand, the condition R - AC shows that the company reaches equilibrium when price and minimum average costs are equal, that is, the most efficient technologies are used in production with the least consumption of resources. In addition, the condition AC = LAC stipulates that the company has optimal sizes, when short-run average costs are equal to minimum long-run average costs.

Chapter 6

Rice. 6.9. Equilibrium of a competitive firm

In the long run

On the other hand, the condition R= MS shows that price as a measure of marginal utility of this product equal to marginal cost as a measure of the opportunity cost of an additional unit of product. Thus, this condition shows that scarce resources are allocated according to consumer preferences.

Producer surplus

Let us imagine that a small manufacturing enterprise first deployed minimal production capacity, and then, thanks to successful economic activity, expanded more and more. Initially, for some time, the expansion of production capacity will be accompanied by a decrease in average total costs. However, the introduction of more and more capacity will lead to an increase in average total costs.

Figure 4.9 illustrates this pattern for five different enterprise sizes. Curve ATC 1 shows the dynamics of average total costs for the smallest of five enterprises, curve ATC 5 for the largest.

The construction of increasingly larger enterprises will lead to a reduction in the minimum cost of producing a unit of output until the size of a third enterprise is reached. However, beyond this limit, expansion of production capacity will mean an increase in the minimum level of average total costs.

Thin lines perpendicular to the horizontal axis. They show the production volumes at which the enterprise should change its size in order to ensure the lowest possible unit production costs.

In the figure, the LATC curve is the long-run average total cost curve or, as it is often called, the choice curve (or planning curve) of the enterprise.

The long-run average cost curve (LATC) shows the lowest cost of producing any given level of output, while allowing for the possibility of changing all factors of production optimally in order to minimize costs.

End of work -

This topic belongs to the section:

Economy

Belgorod State Technological University named after V. G. Shukhov.. Under the general scientific editorship of Professor L. G. Galkin.

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