Okay let's call this chapter 11, part 3, 
and we're in the long run now.... and the
long run means I'm going to let you
change any of the factors of production
that you want, none of them are fixed, 
Sometimes that's good for our average
costs, sometimes it's bad,  and we refer to
this phenomenon as returns to scale,
Sometimes increasing returns... sometimes
decreasing ...so let's go ahead and walk
through these possibilities with all of
our factors being changeable in the long
run.   You've basically got three possible
scenarios.  We can get bigger and it can
make things worse,  you can get bigger and
it can make things better, or you can get
bigger and doesn't seem to make any
change at all.   When you see that things
are getting better, 
i.e. your average costs are dropping as
you increase output,  this is what we
refer to as increasing returns to scale.
So you might imagine doubling the size
of the factory and the labor and all of
your factors and all of a sudden you
quadruple the amount of output.   That
would imply that your average costs are
falling as you got bigger in terms of
scale.  If you double that factory and all
of your labor and all your factors up
and it doesn't make any difference at
all,  then you are dealing with an
increase in scale but no change in your
long-run average cost.  We refer to this
as constant returns to scale.  And down
here... if you increase your quantity and
you see that this actually makes your
cost worse on average,  then this is what
we refer to as decreasing returns to
scale.   Occasionally you'll hear this
green one as economies of scale and
they'll talk about this red one as
diseconomies,  it is the same thing. 
Let's go ahead and graph for the
traditional LRAC,  the early marginalist
Alrfed Marshal in particular,  argued
that you would have every single firm
going through a period of increasing
returns to scale... this is our good
portion over here where LRAC is dropping...
increasing or economies of scale.... and
then you'd have an area where it was
constant,  they're getting bigger in terms
of Q, (right??), but it's not doing
anything to their costs... and then there
was sort of a natural limit, from
Marshalls perspective, on how big a firm
could get,  because he thought that they
would all start experiencing decreasing
returns to scale.  LRAC starts going up as
Q gets bigger.   So this is your
traditional region, or your curve with
three different regions,  and I want you
to start thinking about this as
essentially kind of a road map of all of
the short-run possibilities.  So at any
given short run you might be stuck with
a short run average total cost that
looks like this,  but if I let you double
up on all your factors you might be able
to jump down here and get to a better
shorter run average total cost.... and of
course as you keep doubling you keep
coming up with new short run average
total costs,  but they're all just one
point or another on this LRAC (okay?),  so
firms, especially when we start talking
about them in Chapter twelve,  if they're
doing well and they're making a profit
they're all going to start wondering
about whether or not they should... you
know... get bigger and expand-- and that's
going to depend on their long-run cost.
So why would we ever expect to see a
firm experiencing increasing returns to
scale.  As you get bigger and bigger you
don't have UPS and FedEx deliver you your
inputs and boxes anymore. You probably start hiring semis, you start
using trains,  all of these things are
going to start decreasing your
transportation costs.  Even small
businesses do this.  I worked for a guy
that owned a pool table store and he
started recognizing he could get an edge
on its competition if he ordered in
Bulk and he would get not only better
prices, but when he was shipping the rock
playing surface of a pool table.... if he
could bring them in bulk, then he could put
them on a semi and he would pay much
much lower costs and as you might
imagine the cost of moving a four and a
half by nine foot piece of rock we're
really expensive,  so any edge that we
could get they're usually made a big
difference in terms of our being able to
come to market at a price that was
competitive.   Another thing that happened
was when my former boss would buy pool
tables in larger bulk the company's
accounting firm, or accountants, didn't
have to mess around with accounts
receivables as often.   It was one
transaction,  it was less paperwork,  so
they were willing to pass on some of
those savings.  He also did similar things
whenever he you would buy pool cues.  He 
wouldn't buy just one he'd buy a dozen to
get a price break and he'd pay for it
immediately so that there wasn't even an
accounts receivable to keep track of.   He'd
get a better price because of that.  All
this was only possible when he was
buying inputs in larger quantities.
And then the one that's probably on your
mind is that the bigger you get
sometimes there are methods of
production, maybe that require large
fixed cost outlays, and they only make
sense if you are actually producing at a
relatively high level of output.  The more
output you create the more of those
technologies start to be cost feasible, 
so all of these can help to lower your
LRAC and give you an increasing returns
to scale as you get bigger.
Decreasing returns to scale are a little
harder to conjure up in your mind, but
not so bad once you start thinking about
it.  Once the firm gets really really big
just trying to keep track of the whole
entire production process gets more and
more difficult,  and at times you will see
that they are going to end up very
management heavy ...and if you end up with
too many managers and not enough folks
who are actually you know producing
products.... those managers add to cost but
they may not be contributing much in
terms of helping production.   That can
make your costs worse.  Large firms are
also more likely to get to sued. Very unlikely
to sue tiny firms because they don't
have any money,
especially with limited liability.  So
you are more litigation prone... probably
have to pay more legal fees,  maybe
even keep a lawyer on retainer.   All this
is going to make your costs worse for
larger firms.   Think about McDonald's
getting sued for hot coffee, these kinds
of things, ok? Another thing that pops up
is organized labor, so small mom-and-pop
shops almost never have enough employees
that unionization makes sense, but once a
firm gets very very large and has an
organized workforce it is usually not
too long before that organized workforce
starts trying to improve the wage
bargain in their favor.  All of these
course would lead to the upward piece of
the LRAC. The part where it is getting worse
for you as quantity goes up.  So there's a
few ideas about decreasing returns to
scale.  We'll come back to this at the end
of chapter 12 when we start discussing
long-run equilibrium in perfectly
competitive markets,  so this sort of book
mark it in your brain for right now.
