<< Chapter < Page Chapter >> Page >

The flat section of the long-run average cost curve in [link] (b) can be interpreted in two different ways. One interpretation is that a single manufacturing plant producing a quantity of 5,000 has the same average costs as a single manufacturing plant with four times as much capacity that produces a quantity of 20,000. The other interpretation is that one firm owns a single manufacturing plant that produces a quantity of 5,000, while another firm owns four separate manufacturing plants, which each produce a quantity of 5,000. This second explanation, based on the insight that a single firm may own a number of different manufacturing plants, is especially useful in explaining why the long-run average cost curve often has a large flat segment—and thus why a seemingly smaller firm may be able to compete quite well with a larger firm. At some point, however, the task of coordinating and managing many different plants raises the cost of production sharply, and the long-run average cost curve slopes up as a result.

In the examples to this point, the quantity demanded in the market is quite large (one million) compared with the quantity produced at the bottom of the long-run average cost curve (5,000, 10,000 or 20,000). In such a situation, the market is set for competition between many firms. But what if the bottom of the long-run average cost curve is at a quantity of 10,000 and the total market demand at that price is only slightly higher than that quantity—or even somewhat lower?

Return to [link] (a), where the bottom of the long-run average cost curve is at 10,000, but now imagine that the total quantity of dishwashers demanded in the market at that price of $500 is only 30,000. In this situation, the total number of firms in the market would be three. A handful of firms in a market is called an “oligopoly,” and the chapter on Monopolistic Competition and Oligopoly will discuss the range of competitive strategies that can occur when oligopolies compete.

Alternatively, consider a situation, again in the setting of [link] (a), where the bottom of the long-run average cost curve is 10,000, but total demand for the product is only 5,000. (For simplicity, imagine that this demand is highly inelastic, so that it does not vary according to price.) In this situation, the market may well end up with a single firm—a monopoly—producing all 5,000 units. If any firm tried to challenge this monopoly while producing a quantity lower than 5,000 units, the prospective competitor firm would have a higher average cost, and so it would not be able to compete in the longer term without losing money. The chapter on Monopoly discusses the situation of a monopoly firm.

Thus, the shape of the long-run average cost curve reveals whether competitors in the market will be different sizes. If the LRAC curve has a single point at the bottom, then the firms in the market will be about the same size, but if the LRAC curve has a flat-bottomed segment of constant returns to scale, then firms in the market may be a variety of different sizes.

Questions & Answers

What is (Qs)
Bigi Reply
What is (Qs) and (Qd)
What is (Qs) and (Qd)
What is (Qs) and (Qd)
What is (Qs) and (Qd)
what Make things scarce
Soudani Reply
why do we studied economic
for the stability and growth of any reign.
what is macro economics.?
Google it
how does economics define me
clement Reply
what are the factors that determines the demand and supply
what are the importance of Economics
Betty Reply
tell me something very important about economics..
Fayaz Reply
how may I solve arithmetic mean ,,,all example
Cee Reply
what is agriculture
Itoe Reply
simple method of understanding cost concept
Oludare Reply
what is inflation
Christiana Reply
Inflation is a general increase in price levels
is the action of inflating something
inflation is the persistent increase in general price level of goods and services in an economy over a considerable period of time .
inflation is the general increase of a commodity in a particular period of time.
inflation is a general increase in price levels of commodities
what are the types of inflation?
inflation is the period of persistent rise in the general level of the price of goods services over time
we have creeping inflation, demand pull inflation ,cost push inflation, and galloping inflation .
how can a location of a firm create difference between producers
joy Reply
what is monetary policy
is a monetary from policy that's authorized of country encharces
What would you say about the the mobility of enterprise as a factor of production?
Cathryn Reply
how can I connect myself to this Ambrose platform
kanu Reply
I am good and you I am from sierra Leone and I am new her
kanu Reply
u are welcome bro, here is a good platform for you to be
That i know,thanks bro.
what the main definition of economic
Uhara Reply
the main definition is given by prof Lionel Robbins as a social science which studies human behavior between ends and scarce which have alternative uses
what covers macro economics.
Essay about Microsoft
Kwena Reply

Get the best Principles of economics course in your pocket!


Notification Switch
