Economies of Scale and Long-Run Costs- Micro Topic 3.3

Jacob Clifford

17 Nov 201503:55

Summary

TLDRIn this video, Jacob Clifford explains the concept of economies of scale in economics, using examples from popular movie franchises like Twilight, Harry Potter, and Lord of the Rings. He breaks down how production costs behave in the short and long run, highlighting the differences between increasing, constant, and decreasing returns to scale. Clifford also discusses how average costs fall when companies produce at larger scales and provides examples of how this concept applies to businesses like bread companies. The video emphasizes that firms aim to maximize profits, not just minimize costs.

Takeaways

📚 The Twilight, Harry Potter, and Lord of the Rings movies all experienced economies of scale during production.
🛠 Economists differentiate between the short run and long run in production. In the short run, at least one input is fixed, while in the long run, all resources are variable.
🔄 In the long run, when a company doubles its inputs, three things can happen to output: it can more than double (increasing returns to scale), exactly double (constant returns to scale), or less than double (decreasing returns to scale).
🏭 Increasing returns to scale occur when larger firms can use mass production techniques that smaller firms cannot.
🍞 Even though large firms may have higher total costs due to expensive equipment, their average cost per unit can be lower due to economies of scale.
⚖ Economies of scale result in falling long-run average costs as output increases, thanks to increased efficiency and bulk resource purchases.
🎥 Filming multiple movies at once, like in the case of Twilight, Harry Potter, and Lord of the Rings, creates economies of scale by reducing repetitive costs like travel.
📈 Constant returns to scale occur when costs level off as production increases, meaning there's a limit to cost reductions per unit.
📉 Diseconomies of scale happen when a firm grows too large, causing average costs to rise due to added complexity, such as the need for more managers.
💡 Producers use economies of scale to help make decisions, but they don't rely solely on minimizing costs; they also consider consumer demand to maximize profit.

Q & A

What do the Twilight, Harry Potter, and Lord of the Rings movies have in common?
-They all had economies of scale, meaning their average costs fell as more output (movies) were produced.
What is the difference between the short run and the long run in economics?
-In the short run, at least one input in the production process is fixed, while in the long run, all inputs are variable.
What are the three possible outcomes when a firm doubles its inputs in the long run?
-The firm's output could more than double (increasing returns to scale), exactly double (constant returns to scale), or less than double (decreasing returns to scale).
What happens when a company experiences increasing returns to scale?
-The firm's output more than doubles as it expands because it can take advantage of mass production techniques that smaller firms can't use.
What does it mean for a company to have constant returns to scale?
-When a company doubles its inputs and the output doubles, it has reached a point where increasing size no longer provides any additional production efficiency.
Why do companies experience economies of scale?
-Economies of scale occur because larger companies can use more efficient machines, buy resources in bulk, and utilize cost-saving measures, lowering the average cost of production.
How do the Twilight, Harry Potter, and Lord of the Rings movie productions demonstrate economies of scale?
-They produced multiple movies at once, allowing them to save on costs like travel and production resources, thus lowering the average cost per movie.
What happens when a company reaches diseconomies of scale?
-Diseconomies of scale occur when a company becomes too large, leading to higher average costs due to additional management layers, inefficiencies, or extra facilities like cafeterias.
What should a firm's goal be regarding production and cost in the long run?
-A firm's goal should not be to minimize cost but to maximize profit, meaning it must consider both production costs and consumer demand.
Why wouldn't a small pizza shop use advanced pizza-making robots, even if they could reduce costs?
-A small pizza shop might not sell enough pizza to justify the investment in advanced robots, so it would not be worth the cost despite the potential for lower production costs.

Outlines

00:00

📚 Understanding Economies of Scale

In this introductory paragraph, Jacob Clifford greets the audience and introduces the concept of economies of scale. He sets the tone by asking a fun trivia question about popular movie series like Twilight, Harry Potter, and Lord of the Rings, linking them all to the idea of economies of scale. He mentions that economists differentiate between the short run, where some inputs are fixed, and the long run, where all resources are variable.

🔄 Returns to Scale Explained

Jacob explains the concept of returns to scale in the long run, where all resources can be varied. He outlines the three possible outcomes when a company doubles its inputs: output can more than double (increasing returns to scale), exactly double (constant returns to scale), or less than double (decreasing returns to scale). He emphasizes that increasing returns to scale occur when getting bigger allows for the use of mass production techniques.

💸 Linking Production and Cost

Jacob shifts from discussing production to exploring costs. Using the example of two bread companies, he explains that while larger companies may have higher total costs, their average cost per unit is lower due to economies of scale. This is because larger firms can afford more productive machines and can buy resources in bulk, which reduces the average cost of production as output increases.

🎬 Economies of Scale in Movie Production

Jacob brings up movie franchises like Twilight, Harry Potter, and Lord of the Rings to illustrate economies of scale. He explains that filming multiple movies at once reduces the average cost of production because many costs, such as shipping the crew and cast, are shared across films. This allows movie studios to reduce costs through economies of scale, just like businesses that produce goods at a larger scale.

⚖️ The Concept of Constant and Diseconomies of Scale

Jacob introduces the concepts of constant returns to scale and diseconomies of scale. He explains that at some point, the average cost of production levels off and cannot decrease further (constant returns to scale). Eventually, as production increases too much, diseconomies of scale may set in, where costs begin to rise due to inefficiencies like hiring more managers or expanding facilities beyond optimal capacity.

📈 Maximizing Profit vs. Minimizing Cost

In this final explanatory paragraph, Jacob clarifies that firms don't always aim to produce at the lowest possible cost. Instead, they aim to maximize profit, which depends on consumer demand. Using the example of a local pizza shop, he shows that even if the business could invest in advanced technology to lower production costs, it may not make sense if there isn't enough demand to justify the investment. He emphasizes that economies of scale are useful for decision-making but aren't a one-size-fits-all solution.

👍 Wrapping Up and Encouraging Engagement

In the conclusion, Jacob thanks the audience for watching and encourages viewers to engage with his channel by liking, commenting, and subscribing. He humorously pushes viewers to subscribe, suggesting that doing so shows support for his content. He closes with a light-hearted comment about trusting his viewers to take action.

Mindmap

Keywords

💡Economies of Scale

Economies of scale refer to the cost advantages that firms experience as they increase production. In the video, the concept is illustrated with examples like movie productions and bread companies, where producing at a larger scale lowers the average cost per unit. This happens because firms can use more efficient production techniques and buy resources in bulk.

💡Returns to Scale

Returns to scale describe the relationship between input and output when all production resources are variable. The video explains three possibilities: increasing returns to scale (output more than doubles), constant returns to scale (output exactly doubles), and decreasing returns to scale (output less than doubles), emphasizing how firms experience different efficiencies at different sizes.

💡Short Run

In economics, the short run refers to a period where at least one input in the production process is fixed. The video briefly touches on this concept, explaining that it contrasts with the long run, where all inputs can be adjusted. This distinction is essential in understanding how firms manage production and costs over different time frames.

💡Long Run

The long run is a period in which all factors of production can be varied, allowing firms to adjust all inputs. In the video, the long run is used to discuss economies of scale, returns to scale, and cost structures, as firms can fully adapt their production processes and resources to maximize efficiency.

💡Fixed Costs

Fixed costs are expenses that do not change with the level of production. Although the term isn’t explicitly mentioned in the video, it’s implied when discussing the costs associated with movie productions or bread companies. These costs remain constant regardless of output, influencing how economies of scale affect average costs.

💡Variable Costs

Variable costs change directly with the level of production. The video refers to these in the context of bread companies producing more loaves, where the cost per loaf decreases as more are produced due to economies of scale. Managing these costs is key to reducing the overall average cost of production.

💡Constant Returns to Scale

Constant returns to scale occur when a firm's output doubles in response to doubling its inputs. The video explains that this indicates a point where a firm has maximized the benefits of increasing production size, and further growth does not lead to additional cost efficiencies.

💡Diseconomies of Scale

Diseconomies of scale refer to a situation where a firm becomes too large, causing average costs to rise. In the video, this is illustrated by discussing companies that need to add more managers or facilities, which leads to inefficiencies and higher costs per unit as production increases beyond a certain point.

💡Mass Production Techniques

Mass production techniques refer to highly efficient, large-scale manufacturing processes that allow firms to produce goods at a lower average cost. The video explains that larger firms can access these techniques, giving them an advantage over smaller firms, contributing to increasing returns to scale.

💡Average Cost

Average cost is the total cost of production divided by the number of units produced. The video highlights how economies of scale lower the average cost, especially in cases like producing multiple movies or large-scale bread production, where fixed costs are spread over a larger number of units.

Highlights

Jacob Clifford introduces the concept of economies of scale using popular movie franchises as an example.

In the short run, at least one resource in the production process is fixed, while in the long run all resources are variable.

When inputs double, output can either more than double (increasing returns to scale), exactly double (constant returns to scale), or less than double (decreasing returns to scale).

Economies of scale occur when a company's long-run average costs decrease as output increases due to factors like mass production.

Mass production techniques allow larger firms to be more efficient than smaller firms.

Constant returns to scale occur when increasing production doesn't lead to further cost reductions.

Diseconomies of scale occur when a firm becomes too large, leading to inefficiencies and higher average costs.

Economies of scale were utilized in film production when the Twilight, Harry Potter, and Lord of the Rings series filmed multiple movies at once to save costs.

Companies producing at larger scales can afford advanced equipment and buy resources in bulk, reducing average production costs.

Although total costs may be higher, the average cost per unit falls when producing at scale.

Diseconomies of scale occur when a company grows too large, leading to added complexities like extra management and infrastructure costs.

Companies must balance cost minimization with consumer demand, as seen in local pizza restaurants where maximizing profit is the goal.

Producers make decisions based on economies of scale, but these concepts do not dictate exactly how much to produce.

In real life, one size does not fit all; each company must determine its optimal production level.

The video emphasizes that minimizing costs is not always the main goal for firms; profitability and demand play crucial roles.