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Main content
Current time:0:00Total duration:3:38
PRD‑1 (EU)
PRD‑1.A (LO)
PRD‑1.A.10 (EK)
PRD‑1.A.11 (EK)
PRD‑1.A.9 (EK)

Video transcript

in the last video we were able to construct here in red this long-run average total cost curve based on connecting the minimum points or the bottoms of the use of our various short-run average total cost curves each of those short short run average total cost curves were based on a certain amount of fixed costs in the short run but in the long run you can change your fixed costs and here our fixed costs were the number of trucks and so we can vary it to optimize for a certain amount of quantity now when we did that you could see a little trend here especially as we go up to the way I drew it it wouldn't necessarily be up to 200 of whatever you're producing but the way I drew it you see that this part right over here it looks like our long-run average total cost curve is declining down so we one way to think about it is we are getting more and more efficient at producing our tacos in the long run as we produce more of them until we get to 200 tacos and so at this part of our curve we are experiencing economies economies of scale and we've talked about where economies of scale can come from it can come from specialization of Labor or even machine specialization so as you get more and more scale you can have different parts of your process specializing in baking the taco shells or grading the cheese or cooking the meat whatever it is so there's a specialization you could get better at sourcing so as you get more scale you might be able to order more of your supplies at a time so you get better deals you might be able to even who knows at some point start a farm yourself and then cut out the middleman and so forth and so on now as we get past that point we see that our long-run average total cost curve at least in this example started to trend up and so this part of the curve you could say that we are experiencing diseconomies of scale this economies of scale so what would cause diseconomies of scale well these would most typically happen because what are known as coordination issues as an organization grows you have more people more resources that you have to coordinate and so that complexity can sometimes make an organization more inefficient there's other diseconomies of scale at some very large scale you might be depleting all of the low-hanging fruit of your inputs and so you have to pay more for some of your inputs maybe you've already depleted the people who are willing to work for less so you have to raise wages or you've depleted a lot of the resources you need so you have to find new more expensive resources now in this curve it's not as obvious but you can also have a notion of constant returns to scale so if we had a long-run average total cost curve that looked something like this let me draw it over here then in this section right over here as the average total cost the long-run average total cost is going down and that would be economies of scale this section over here as the long-run average total cost is going up that would be our diseconomies of scale but this section over here where it is constant you might guess what that is called that is that is called constant economies of scale or constant returns to scale sometimes known as efficient scale