Understanding Long Run Average Cost Curves and Their Implications for Market Structure

The video tutorial explains long run average cost (LRAC) curves, focusing on economies and diseconomies of scale. It uses a factory example to illustrate how increasing the size of a firm can initially lead to lower average costs (economies of scale) but eventually result in higher costs (diseconomies of scale) as the firm becomes too large to manage efficiently. The tutorial also discusses the implications of LRAC on market structure, highlighting how firms aim to produce at the minimum point of the LRAC curve to remain competitive. Different shapes of LRAC curves are analyzed, including the typical U-shape and a flat curve, which indicate varying efficiencies at different output levels.

What happens to average costs when a factory experiences economies of scale?

• They decrease.

• They fluctuate randomly.

• They remain constant.

• They increase.

What is a potential consequence of expanding a factory too much?

• Increased specialization.

• Improved coordination.

• Diseconomies of scale.

• Decreased average costs.

What happens to average costs when a market experiences diseconomies of scale?

• They become unpredictable.

• They remain constant.

• They decrease.

• They increase.

How is the long run average cost curve typically shaped for many industries?

• Flat

• V-shaped

• U-shaped

• L-shaped

What does the minimum point on the long run average cost curve represent?

• Total market size

• Average production cost

• Minimum efficient scale

• Maximum production capacity

Why do firms aim to produce at the productively efficient output?

• To increase their workforce

• To minimize average costs and remain competitive

• To diversify their product range

• To maximize their market share

What is the minimum efficient scale?

• The smallest output level where average costs are minimized

• The largest output level a firm can produce

• The point where diseconomies of scale begin

• The average output level of all firms in the market