- [Lecturer] In the last video,
we were able to construct
here in red this long-run
average total cost curve
based on connecting the minimum points
or the bottoms of the U's
of our various short-run
average total cost curves.
Each of those short-run
average total cost curves
were based on a certain
amount of fixed cost
in the short run, but in the long run,
you can change your fixed costs.
And here are fixed costs
with the number of trucks.
And so, we can vary it to optimize
for a certain amount of quantity.
Now when we did that, you
could see a little trend here
especially as we go up
to, the way I drew it,
it wouldn't necessarily be up to 200
or whatever you're producing,
but the way I drew it,
you see that this part right over here,
it looks like our long-run
average total cost curve
is declining down.
So, one way to think about it is,
we are getting more and more efficient
at producing our tacos in the long run
as we product more of them
until we get to 200 tacos.
And so, at this part of our curve,
we are experiencing economies of scale.
And we've talked about
where economies of scale
can come from.
It can come from specialization
of labor or even machines.
Specialization.
So, as you get more and more scale,
you can have different
parts of your process
specializing in making the taco shells
or grating the cheese or cooking the meat,
whatever it is.
So, there is a specialization.
You could get better at sourcing.
So, as you get more scale,
you might be able to order
more of your supplies at a
time, so you get better deals.
You might be able to even,
who knows, at some point,
start a farm yourself and
then cut out the middleman,
and so forth and so on.
Now as we get past that point,
we see that our long-run
average total cost curve,
at least in this example,
started to trend up.
And so, this part of the curve,
you could say that we are experiencing
diseconomies of scale.
Diseconomies
of scale.
So, what would cause
diseconomies of scale?
Well, these would most typically happen
because what are known
as coordination issues.
As an organization grows,
you have more people,
more resources that
you have to coordinate.
And so, that complexity can sometimes make
an organization more inefficient.
There's other diseconomies of scale.
At some very large scale,
you might be depleting
all of the low-hanging
fruit of your inputs,
and so, you have to pay more
for some of your inputs.
Maybe you've already depleted
the people who are willing
to work for less, so
you have to raise wages,
or you've depleted a lot
of the resources you need,
so you have to find new,
more expensive resources.
Now in this curve, it's not as obvious,
but you can also have a notion
of constant returns to scale.
So, if we had a long-run
average total cost curve
that looked something like
this, let me draw it over here,
then in this section right over here,
as the average total cost, the
long-run average total cost
is going down, that would
be economies of scale.
This section over here,
as the long-run average
total cost is going up,
that would be our diseconomies of scale.
But this section over
here where it is constant,
you might guess what that is called.
That is called constant economies of scale
or constant returns to scale,
sometimes known as efficient scale.
