Factors of U-shaped Long Run Average Total Cost
Economies of scale or economies of mass path explain the down sloping part of the long run Average total cost. As plant size increases a host of factors contribute to decline average total cost.
The main factors that result in the U-shape of long run average total cost are as follow:
As plant size increase more workers are hired, hiring more workers means that the jobs can be divided and sub divided each worker may have just one job to perform instead of 5 or 6 which leads to worker getting specialist in that one job.
In small plant the manager has to look after small number of people and has to perform multiple tasks like a manager might be looking after human resource department as well as marketing. This leads to one manager doing too many tasks. Also small firm cannot use management specialists to best advantage.
Small firms cannot use most efficient equipment for example in automobile industry the most efficient method of production would use robotics and assembly line equipment which is not affordable for small firms.
Many products have design and developed costs which become less and less as output is increase. Similarly advertising cost also decline per car, per computer, per product as more output is sold. All these factors contribute to lower average total cost for a firm that has expanded its operations.
Diseconomies of Scale
As firm keeps on expanding this continued expansion leads to dis economies of scale and therefore hire average total cost. The main factor causing diseconomies of scale is the difficulty of efficiently controlling and coordinating a firms operation as it becomes a large scale producer. In massive production facilities workers feel separated from their management and work less efficiently. Also there are many levels of management between top level and the workers working at actual production site. This leads to poor communication between top and lowest level.
Constant Returns to Scale
If a 10% increase in resource brings proportionate increase in output.
March 14, 2019