Economics help needed asap

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username4966870
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I’ve been going through the specification and I realised I didn’t really understand the costs part. I’ve brushed up on costs (fixed and variable and total), and their averages, I also know about the short run and the long run, however I have difficulty understanding how this all links to economies of scale (although I know what economies of scale is). I’m just confused about the graphs. What are the short run average cost curves used for. What about the long ones? What other things can you plot on short run and long run graphs? When showing eco/diseconomies of scale, do we use the short run graphs or the long run ones? Thanks
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smokescreeen318
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Let me start with the LRAC (Long-Run Average Costs) and SRAC (Short-Run Average Costs) curves. Since you understand the shape of the SRAC curve, I won't bother with that. A single firm will have different SRAC curves for different sizes. A larger firm will have a curve further to the right compared to a smaller firm. In the long run, we assume that at all sizes the firm will operate at the lowest point of the SRAC curves, so the LRAC is just a line drawn through the lowest point of all possible SRAC curves as shown in the image and video linked below and here (Idk how to format links, so its in a spoiler):
Spoiler:
Show
https://13otsusa.files.wordpress.com.../picture-5.png <- Image
https://www.youtube.com/watch?v=6FkFFvOIn8A <- Video
You might want to turn on subtitles and play the vid at .75 speed because he talks really fast


Economies of scale are when your LRAC goes down due to increased output. You by more raw materials, so get cheaper prices and lower discounts, for example. So as you increase output, the LRAC curve shifts downwards. Diseconomies of scale are when your LRAC rises with output, as your firm becomes "too big". You spend more to hire more managers to manage a larger workforce and allocate a larger amount of resources.

For usage, at my level, I'm not too sure what the SRAC is used for, apart from finding the LRAC.
Butat A level, we use the LRAC curve with a new Marginal cost (MC) curve and other price curves to determine what the best output a company can produce to maximize profits and efficiency. The MC and LRAC curves also give an insight into how different markets produce and answers to questions like why monopolies make more profits than an oligopoly, in a more visual and mathematical way.

When showing economies and diseconomies, you always use the LRAC btw.
If you have any other questions, ask away, ill try answer within a day, if someone else doesn't answer already
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username4966870
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(Original post by smokescreeen318)
Let me start with the LRAC (Long-Run Average Costs) and SRAC (Short-Run Average Costs) curves. Since you understand the shape of the SRAC curve, I won't bother with that. A single firm will have different SRAC curves for different sizes. A larger firm will have a curve further to the right compared to a smaller firm. In the long run, we assume that at all sizes the firm will operate at the lowest point of the SRAC curves, so the LRAC is just a line drawn through the lowest point of all possible SRAC curves as shown in the image and video linked below and here (Idk how to format links, so its in a spoiler):
Spoiler:
Show
https://13otsusa.files.wordpress.com.../picture-5.png <- Image
https://www.youtube.com/watch?v=6FkFFvOIn8A <- Video
You might want to turn on subtitles and play the vid at .75 speed because he talks really fast


Economies of scale are when your LRAC goes down due to increased output. You by more raw materials, so get cheaper prices and lower discounts, for example. So as you increase output, the LRAC curve shifts downwards. Diseconomies of scale are when your LRAC rises with output, as your firm becomes "too big". You spend more to hire more managers to manage a larger workforce and allocate a larger amount of resources.

For usage, at my level, I'm not too sure what the SRAC is used for, apart from finding the LRAC.
Butat A level, we use the LRAC curve with a new Marginal cost (MC) curve and other price curves to determine what the best output a company can produce to maximize profits and efficiency. The MC and LRAC curves also give an insight into how different markets produce and answers to questions like why monopolies make more profits than an oligopoly, in a more visual and mathematical way.

When showing economies and diseconomies, you always use the LRAC btw.
If you have any other questions, ask away, ill try answer within a day, if someone else doesn't answer already
Thanks for your response. I understood the eco/diseconomies of scale explanation but not the LRAC and SRAC curve explanation. No matter how hard I try it just doesn’t make sense to me lol. I think I need to start from the beginning
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1st superstar
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(Original post by smokescreeen318)
Let me start with the LRAC (Long-Run Average Costs) and SRAC (Short-Run Average Costs) curves. Since you understand the shape of the SRAC curve, I won't bother with that. A single firm will have different SRAC curves for different sizes. A larger firm will have a curve further to the right compared to a smaller firm. In the long run, we assume that at all sizes the firm will operate at the lowest point of the SRAC curves, so the LRAC is just a line drawn through the lowest point of all possible SRAC curves as shown in the image and video linked below and here (Idk how to format links, so its in a spoiler):
Spoiler:
Show
https://13otsusa.files.wordpress.com.../picture-5.png <- Image
https://www.youtube.com/watch?v=6FkFFvOIn8A <- Video
You might want to turn on subtitles and play the vid at .75 speed because he talks really fast


Economies of scale are when your LRAC goes down due to increased output. You by more raw materials, so get cheaper prices and lower discounts, for example. So as you increase output, the LRAC curve shifts downwards. Diseconomies of scale are when your LRAC rises with output, as your firm becomes "too big". You spend more to hire more managers to manage a larger workforce and allocate a larger amount of resources.

For usage, at my level, I'm not too sure what the SRAC is used for, apart from finding the LRAC.
Butat A level, we use the LRAC curve with a new Marginal cost (MC) curve and other price curves to determine what the best output a company can produce to maximize profits and efficiency. The MC and LRAC curves also give an insight into how different markets produce and answers to questions like why monopolies make more profits than an oligopoly, in a more visual and mathematical way.

When showing economies and diseconomies, you always use the LRAC btw.
If you have any other questions, ask away, ill try answer within a day, if someone else doesn't answer already
😳 dang it should have done business instead... Literally don't understand any of the sh*t I do in economics... 🤮😭
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username4966870
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(Original post by 1st superstar)
😳 dang it should have done business instead... Literally don't understand any of the sh*t I do in economics... 🤮😭
Haha it’s alright it’s just this one thing I missed in lessons doesn’t add up for me
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smokescreeen318
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Let me try explain that LRAC and SRAC thing again lol. Hopefully, I can do a better job this time xD.
So I assume you understand the shape of the SRAC curve, but ill explain it anyway. So in the short run, you cant easily buy land, capital or get new entrepreneurs. But what you can do is hire more or lay off workers.
Labour is the only variable factor of production, while land, capital, and enterprise are fixed. so your SRAC is made from the variable cost of labour, AVC (Avg Variable Cost). As you increase the spending on workers, output rises by a larger amount, as workers specialize. this means that for every unit increase of output, the AVC falls. But beyond a point, the cost will start to rise again. This happens when there is not enough land and capital for workers to work efficiently and productivity falls. This explains the U shape of the SRAC curve.

Now firms (in the same market ofc) of different sizes have different amounts of land, capital, and enterprise. so they have their SRAC curves at different points on a graph, Hence the 5 curves, A-E in the video I sent you.
In the long run, All 4 factors of production are variable so firms can very easily move along the SRAC and even shift the SRAC to the right or left. Since the effect of labour is very easy to change in the short run, In the long run, it becomes insignificant, and we just assume firms will work on the lowest point of the SRAC curve, hence we only care about the point. So all we care about in the long-run is the movement of the whole SRAC curve, which is just a point now. This point can be shifted along a new curve, which is the LRAC curve. The shape of the LRAC curve is explained by economies/diseconomies of scale.

This is the best I can do tbh, if it still doesn't make sense just tell me what exactly and ill see what I can do xD
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username4966870
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(Original post by smokescreeen318)
Let me try explain that LRAC and SRAC thing again lol. Hopefully, I can do a better job this time xD.
So I assume you understand the shape of the SRAC curve, but ill explain it anyway. So in the short run, you cant easily buy land, capital or get new entrepreneurs. But what you can do is hire more or lay off workers.
Labour is the only variable factor of production, while land, capital, and enterprise are fixed. so your SRAC is made from the variable cost of labour, AVC (Avg Variable Cost). As you increase the spending on workers, output rises by a larger amount, as workers specialize. this means that for every unit increase of output, the AVC falls. But beyond a point, the cost will start to rise again. This happens when there is not enough land and capital for workers to work efficiently and productivity falls. This explains the U shape of the SRAC curve.

Now firms (in the same market ofc) of different sizes have different amounts of land, capital, and enterprise. so they have their SRAC curves at different points on a graph, Hence the 5 curves, A-E in the video I sent you.
In the long run, All 4 factors of production are variable so firms can very easily move along the SRAC and even shift the SRAC to the right or left. Since the effect of labour is very easy to change in the short run, In the long run, it becomes insignificant, and we just assume firms will work on the lowest point of the SRAC curve, hence we only care about the point. So all we care about in the long-run is the movement of the whole SRAC curve, which is just a point now. This point can be shifted along a new curve, which is the LRAC curve. The shape of the LRAC curve is explained by economies/diseconomies of scale.

This is the best I can do tbh, if it still doesn't make sense just tell me what exactly and ill see what I can do xD
Yep I understand it now thanks
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