But the question is why we first get increasing returns to scale due to which long-run average cost falls and why after a certain point we get decreasing returns to scale due to which long-run average cost rises. It slopes downwards in the initial stages but thereafter rises slowly. Now marginal cost is just a change in the total cost. This happens because when the size of plant becomes too large, it becomes difficult to exercise control and to bring about proper coordination. When long run marginal costs are below long run average costs, long run average costs are falling.
Appropriate educational courses at colleges and universities. The L-shape of the long-run average cost curve implies that in the beginning when output is expanded through increase in plant size and associated variable factors, cost per unit falls rapidly due to economies of scale. The second view considers the entrepreneur to be a fixed indivisible factor. In the short run full adjustment to a change in demand is hindered by the fact that some of the factors are fixed in supply for the time being. Such changes will be shown by shifting the curves to new positions. While history has shown relatively few examples, there are some companies that tried to make industrial towns. Generally speaking, the shape of the curve depends on the relative importance of the fixed and the variable costs of production and the degree of sharpness with which the law of diminishing returns is operative for the variable factors.
Only at a very large scale, managerial costs may rise. The above points are illustrated diagrammatically in Figure 7. Marginal costs are often shown on these graphs, with marginal cost representing the of last unit produced at each point; slope curve or first derivative total variable. For instance, the large firm can afford to employ specialist sellers and buyers which will give great advantages. A pool of labour with appropriate skills within the area. Specialist suppliers may also enter the industry and existing firms may benefit from their proximity.
Due to the operation of the law of increasing returns the firm is able to work with the machines to their optimum capacity and as a consequence the Average Cost is minimum. In other words, there is a certain optimum proportion between an entrepreneur and other inputs and when that optimum proportion is reached, further increases in the other inputs to the fixed entrepreneur means the proportion between the inputs is moved away from the optimum and, therefore, these results in the rise in the long-run average cost. Indeed the firm may produce so many related products that the brand name helps to advertise all of these different products. The slope of the variable cost function is marginal costs. Again investors are more likely to have confidence in buying these securities in a large company like the Tata Chemicals than in a small company like the Usha Martin Black or India Linoleums. Third degree: when consumers are identified in different market segment that recognizes the different price elasticities in each segment. Eventually diminishing average returns: as extra units of a variable factor are added to a given quantity of a fixed factor the output per unit of the variable factor will eventually diminish.
Suppose U 1, U 2, and U 3 in Fig. This firm will maximize its profit by producing: A. Chamberlin, constant returns to scale cannot exist and long-run average cost cannot remain constant. The idea is as labor is increased with capital being fixed, productivity increases upto a point and then decreases and later becomes negative. T he additional costs of becoming too large are called diseconomies of scale. To bring coordination, more assistants and supervisors and more bureaucracy is required which also lengthens the chain of communication between the management and production unit.
Transport: A good system of road, rail, air and sea links will be important to all firms in the area and they all share the advantages of the adequate provision of these links. At its profit-maximizing output, this firm's total profit will be: A. Therefore, the shape of the marginal cost curve in the short run depends on the shape of the marginal product curve of the variable factor labour in our example. B: Because of constant returns to scales. The marginal cost curve is U-shaped.
Later it remains constant at the optimum level of output due to the influence of constant returns. Now in the long run, we allow all factors of production to change, so their is no more diminishing marginal product. The first view as held by Chamberlin and his followers is that when the firm has reached a size large enough to allow the utilisation of almost all the possibilities of division of labour and the employment of more efficient machinery, further increases in the size of the plant will entail higher long-run unit cost because of the difficulties of management. Diseconomies of Scale : Diseconomies of scale will set in at some stage in title growth of the firm and result in rising per unit costs. In a free market economy, productively efficient firms use these curves to find the optimal point of production, where they make the most profits. The law of diminishing marginal product indicates that: A. The long-run cost curve is the locus of equilibrium point on the short-run cost curves.
The economies of scale discussed above are all internal; they are generated from within the firm as a consequence of its growth. Thus, if the demand for bus transport in a particular town increases greatly in the short run there should be greater use of the existing buses. The firm's short-run supply curve is: A. Marginal cost curve cuts average cost variable or total cost at its minimum simply to portray the law of variable proportions. Refer to the above data. Economies of scale can occur because firms are taking advantage of their size and specialization.
The firm secures economies of large scale production in the initial stage. When average product of the variable factor labour is increasing, average variable cost is decreasing. Thus, in the short run we find that as output increases the average cost falls up to the point of maximum capacity of the equipment and scale used in the firm and rises thereafter. These two explanations overlap substantially. When the marginal cost curve is above an average cost curve the average curve is rising.