BAM 040: Managerial Economics
SAS Module #20
Name:______________________________________________________________ Class number: _______
Section: ____________ Schedule:_____________________________________ Date:_______________
Lesson title: The Long-Run Costs (Economies vs. Materials:
Diseconomies of Scale) Student Activity Sheets
Lesson Objectives: References:
1. I can explain the concept of long run costs. Managerial Economics Business
2. I can differentiate economies of scale and diseconomies of scale. Strategy Ninth Edition by
Baye,Prince,2017
Investopedia.com
“Failure is the opportunity to begin again more
intelligently.”
A. LESSON PREVIEW/REVIEW
1) Introduction (2 min)
Hello buddy! I know you already have enough ideas about the concept of long-run costs. For this
meeting, we will elaborate some of the important topics that are connected with the long-run costs. Stay
focus and motivated! You can do it!
Pre-Test/Review (5 min)
Direction: Write TRUE if the statement is correct, otherwise write FALSE.
_______1. Total cost is the total opportunity cost of each factor of production as part of its fixed or
variable costs. T
_______2.Total variable cost is equal to short-run total cost minus total fixed cost. F
_______3. Fixed costs (FC) are incurred dependent of the quality of goods or services produced. F
_______4. In economics, marginal cost is the change in the total cost when the quantity produced
changes by one unit. T
_______5. In the short run, total cost is equal to zero when output is equal to zero. F
B.MAIN LESSON
1) Activity 2: Content Notes (60 min)
The Long-Run Costs
As in the short run, costs in the long run depend on the firm’s level of output, the costs of factors, and the
quantities of factors needed for each level of output. The chief difference between long- and short-run
costs is there are no fixed factors in the long run. There are thus no fixed costs. All costs are variable, so
we do not distinguish between total variable cost and total cost in the long run: total cost is total variable
cost.
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This document and the information thereon is the property of PHINMA Education
BAM 040: Managerial Economics
SAS Module #20
Name:______________________________________________________________ Class number: _______
Section: ____________ Schedule:_____________________________________ Date:_______________
The long-run average cost (LRAC) curve
shows the firm’s lowest cost per unit at
each level of output, assuming that all
factors of production are variable. The
LRAC curve assumes that the firm has
chosen the optimal factor mix for producing
any level of output. The costs it shows are
therefore the lowest costs possible for each
level of output. It is important to note,
however, that this does not mean that the
minimum points of each short-run ATC
curves lie on the LRAC curve.
The five different short-run average cost
(SRAC) curves each represents a different
level of fixed costs, from the low level of
fixed costs at SRAC1 to the high level of fixed costs at SRAC5. Other SRAC curves, not shown in the
diagram, lie between the ones that are shown here. The long-run average cost (LRAC) curve shows the
lowest cost for producing each quantity of output when fixed costs can vary, and so it is formed by the
bottom edge of the family of SRAC curves. If a firm wished to produce quantity Q3, it would choose the
fixed costs associated with SRAC3.
The long-run average cost curve shows the cost of producing each quantity in the long run, when the
firm can choose its level of fixed costs and thus choose which short-run average costs it desires. If the
firm plans to produce in the long run at an output of Q3, it should make the set of investments that will
lead it to locate on SRAC3, which allows producing q3 at the lowest cost. A firm that intends to produce
Q3 would be foolish to choose the level of fixed costs at SRAC2 or SRAC4. At SRAC2 the level of fixed
costs is too low for producing Q3 at lowest possible cost, and producing q3 would require adding a very
high level of variable costs and make the average cost very high. At SRAC4, the level of fixed costs is
too high for producing q3 at lowest possible cost, and again average costs would be very high as a
result.
1. Economies of scale.
The U‐shape of the LATC reflects the changing costs of production that the firm faces in the long‐
run as it varies the level of its factors of production and hence the level of its output. At low levels
of output, a firm can usually increase its output at a rate that exceeds the rate at which it
increases its factor inputs. When this situation occurs, the firm's average total costs are falling,
and the firm is said to be experiencing economies of scale.
Note: When there are economies of scale, increasing the size of the operation decreases
the minimum average cost.
2. Constant Return to Scale
At higher levels of output, the firm may find that its output increases at the same rate at which it
increases its factor inputs. In this case, the firm's average total costs remain constant, and the
firm is said to experience constant returns to scale.
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This document and the information thereon is the property of PHINMA Education
BAM 040: Managerial Economics
SAS Module #20
Name:______________________________________________________________ Class number: _______
Section: ____________ Schedule:_____________________________________ Date:_______________
3. Diseconomies of Scale
At even higher output levels, the firm's output will tend to increase at a rate that is below the rate
at which it increases its factor inputs. In this situation, average total costs are rising, and the firm
is said to experience diseconomies of scale.
Note: In this situation, manager should develop strategies on how to decrease the cost
incurred as more output are produced in order to attain again the economies of scale.
Internal Economies of Scale
As a business grows in scale, its costs will fall due to internal economies of scale. An ability to produce
units of output more cheaply.
Types of Internal Economies of Scale
➢ Production / Technical Economies
•Larger firms can use computers / technology to replace workers on a production line
•Mass production lowers cost per unit
•Large scale producers can employ techniques that are unable to be used by a small scale
producer.
• Able to transport bulk materials.
➢ Purchasing / Marketing Economies
• Advertising costs can be spread across products
• Large businesses can employ specialist staff
• Bulk buying - if you buy more unit cost falls
➢ Financial Economies
• Larger firms have better lending terms and lower rates of interest
• Easier for large firms to raise capital.
• Risk is spread over more products.
• Greater potential finance from retained profits.
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This document and the information thereon is the property of PHINMA Education
BAM 040: Managerial Economics
SAS Module #20
Name:______________________________________________________________ Class number: _______
Section: ____________ Schedule:_____________________________________ Date:_______________
• Administration costs can be divided amongst more products
External Economies of Scale - Are those shared by a number of businesses in the same industry in a
particular area.
These are advantages gained for the whole industry, not just for individual businesses.
For Example:
• As businesses grow within an area, specialist skills begin to develop.
• Skilled labour in the area – local colleges may begin to run specialist courses.
• Being close to other similar businesses who can work together with each other.
• Having specialist supplies and support services nearby.
• Reputation
Activity 3: Skill-Building Activities (20min)
Part 1
Direction: Listed on the table below are the main types of internal scale economy. On your own point of
view, kindly put an example on the table on how an economy of scale happens on each type of internal
scale economy. (Note: Please refrain from looking at the concept notes upon answering this portion.)
No. Internal Economy of Scale Example
1 Technical/Production
2 Financial
3 Purchasing
4 Marketing
5 Managerial
Part 2
Direction: Identify whether the following items are internal or external economies of scale.Write “Internal
or External” before the given number.
________________1. As an industry develops, all the firms engaged in it decide to divide and sub-divide
the process of production among themselves.
________________2. Many scientific and trade journals are published which are being shared among
the firms in a given industry.
________________3. A big firm has its own means of transportation to carry finished as well as raw
material from one place to another.
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This document and the information thereon is the property of PHINMA Education
BAM 040: Managerial Economics
SAS Module #20
Name:______________________________________________________________ Class number: _______
Section: ____________ Schedule:_____________________________________ Date:_______________
________________4. Skilled workers are employed in a firm which leads to save production, time and
simultaneously encouraged new ideas.
________________5. All the large sized firms are in a position to use its by-products and waste-material
to produce another material and thus, supplement to their income.
Part 3
Direction: On your own opinion, kindly answer the following questions:
1. Does it matter for a manager of a firm to know whether economies or diseconomies of scale occur?
Elaborate your answer.
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
2. What do you think are the reasons why diseconomies of scale happen in several firms?
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
3. In connection with your answer on #2, if you will become an owner/manager of a firm in the future,
how will you respond on a situation wherein diseconomies of scale start to occur?
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
4. What is the main difference between economies and diseconomies of scale in terms of cost and
output produced?
___________________________________________________________________________________
___________________________________________________________________________________
________________________________________________________________________________
2) Activity 5: Check for Understanding (20min)
Practice Problem
1. The figure shows three average total cost curves for
A1 Sewing, a company that sells sewing machines. The
Company can use three different sized stores, which
Account for the different cost curves.
a. Which average cost curve occurs when A1 uses
The smallest store? The largest store?
b. Indicate A1’s long-run average cost curve (LRAC)
in the figure.
c. If A1 plans to sell 6 sewing machines per day,
what sized store will A1 use?
d. Over what range of output does A1 Sewing have
Economies of scale? Diseconomies of scale?
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This document and the information thereon is the property of PHINMA Education
BAM 040: Managerial Economics
SAS Module #20
Name:______________________________________________________________ Class number: _______
Section: ____________ Schedule:_____________________________________ Date:_______________
2. Describe economies of scale and diseconomies of scale?
Short answer and numeric questions:
Write your Answers here:
1. Describe how a long-run average
cost curve is constructed.
2. What are economies of scale?
What leads to economies
of scale?
C. LESSON WRAP-UP
1) Activity 6: Thinking about Learning (5mins)
A. Work Tracker
Congratulations! You are done with our session! Let’s track your progress. Shade the session number
you just completed.
B. Think about your Learning
1. How do you find our topic for today? Were you able to hit our learning objectives for today?
__________________________________________________________________________________
________________________________________________________________________________
2. What additional improvements would you suggest in order to understand the topic easily?
__________________________________________________________________________________
________________________________________________________________________________
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This document and the information thereon is the property of PHINMA Education
BAM 040: Managerial Economics
SAS Module #20
Name:______________________________________________________________ Class number: _______
Section: ____________ Schedule:_____________________________________ Date:_______________
Key to Corrections
Pre-Test
1. T 2. F 3. F 4. T 5. F
Skill Building Activities
Sample Answers only (Answers may vary depending on how the students explain his/her ideas)
Part 1
No. Internal Economy of Scale Example
1 Technical/Production Use of technology in the production process
2 Financial Ability to lend or borrow money easily with a lower interest
rates
3 Purchasing
Purchasing raw materials in bulk orders
4 Marketing Lower advertisement cost per unit of output produced
5 Managerial Cooperation among different departments resulting to higher
level of production with least costs incurred.
Part 2
1. External 2. External 3. Internal 4. Internal 5. Internal
Part 3
1. Yes because economies of scale is favorable for the company as it helps to reduce the costs to be
incurred while diseconomies of scale is unfavorable because is entails higher costs while increasing the
output produced.
2. Diseconomies of scale happens due to several factors which can be internal or external. It can be
external in such a way that technical issues arise on the production process or organizational issues
exist.
3. Answers may vary depending on the students.
4. Economies of scale exists when the level of cost per unit decreases as the level of output increases
while diseconomies of scale exists when the level of cost per unit increases as more outputs are
produced.
Submit your activity sheets before the end of the session!
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This document and the information thereon is the property of PHINMA Education
