Another post geared towards the A2 exam next week. Long-run and short-run average costs curves are part of economies of scale and market structures essays.
In the short run at least one factor of production is fixed but In the long run the firm can alter all of its inputs, using greater quantities of any of the factors of production. It is now operating on a larger scale. So all of the factors of production are variable in the long run. In the very long run, technological change can alter the way the entire production process is organised, including the nature of the products themselves. In a society with rapid technological progress this will shrink the time period between the short run and the long run.
The long-run average cost (LAC) curve shows the least costly combination of producing any particular quantity. The graph below shows short-run average costs (SATC) and the LAC. The LAC forms a tangent with the SATC and it is therefore the lowest possible average cost for each level of output where the factors of production are all variable – it is formed from a series of SATC curves. The diagram shows:
From the diagram A is the least-cost way to make output Q1 in the short run. B is the least-cost way to make an output Q2. It must be more costly to make Q2 using the wrong combination of factors of production, for example the quantity corresponding to point E. For the combination of factors of production at A, SATC1 shows the cost of producing each output, including Q2. Hence SATC1 must lie above LAC at every point except A, the output level for which the combination of factors of production is best
The LAC is a flatter U-shape than the SATC curves and can be explained by economies of scale and diseconomies of scale. However it is really important to note that the firm does not necessarily produce at the minimum point on each of its SATC curves. Thus the LAC curve shows the minimum average cost way to produce a given output when all factors can be varied, not the minimum average cost at which a given plant can produce.
The Long-Run Average Cost is sometimes abbreviated to LRAC The Short-Run Average Cost is sometimes abbreviated to SRAC
This LAC is also know as the envelope curve (looks similar to the back of an old style envelope) – see image.
Here is a great infographic about the iPhone that I got from colleague David Parr. It shows the impact the iPhone has had on the global supply chain, jobs and the world in general. Some statistics from it are as follows:
1. To assemble 1 iPhone = 600 workers
2. 500,000 iPhones produced in 1 day (at peak)
3. 307,250 jobs have been created by Apple
4. 44% are sold in North, Central and South America. 9% are sold in Japan alone.
5. There are 330 manufacturing locations in China.
Here is Paul Solman of PBS disucussing the issue of humans becoming obsolete in the years to come. There is an interview with Will.i.am, lead singer of the Black Eyed Peas,
who is also director of creative innovation at Intel and someone who worries about the so-called digital divide between those who know how to capitalise on technology and those who don’t have a clue.
He uses the concept of “Star Trek,” as people don’t seem to care about those that “Star Trek” left behind in the ghettos.
It was like, what was the life like for the people that “Star Trek” left? They never even put a perspective on homeboy’s family with the little visor. So technology can go either way, right? It can be the prize for humanity, the thing that we created, like, whoa, check this out, or it could be the doom.
Solman goes on to talk about Emperor Vespasian who built the Coliseum without labour-saving technology as it would displace manual labour. Also in 19th Century the Luddites who sabotaged the textile machinery that was displacing them. However technology just continued to be developed and today we have trainers being printed in 3-D with no human input. One of the problems in the global economy today is that we think that education ends when we graduate from University. Education actually starts when you enter the workforce. Well worth a look.
Here are some up to date statistics on New Zealand’s productivity from Grant Cleland of the Parliamentary Library in Wellington. He looks at the productivity of Labour, Capital and Multifactor.
Labour – is measured as a ratio of output to labour input. The change in labour productivity can also be broken into its component parts:
– The amount of capital available to be used by the labour force; and
– A change in multi-factor productivity (the change in output that cannot be attributed to a change in either capital or labour inputs).
The recent reduction in capital per worker (or, capital shallowing) could be the result of the recession, in that firms would have been unwilling to upgrade capital plant or invest in new plant when the demand for their goods and services was uncertain.
Capital – is measured as a ratio of output to capital input.
Multifactor – is growth that cannot be contributed to either capital or labour, such as an improvement in knowledge, methods or processes. An increase in multifactor productivity is commonly referred to as a technical change or efficiency growth.