Economies of Scale and Long-Run Costs- Micro Topic 3.3
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
📚 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
💡Returns to Scale
💡Short Run
💡Long Run
💡Fixed Costs
💡Variable Costs
💡Constant Returns to Scale
💡Diseconomies of Scale
💡Mass Production Techniques
💡Average Cost
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.
Transcripts
hey econ students this is Jacob Clifford
welcome to ACDC econ what do the
Twilight movies the Harry Potter movies
and the whole Lord of the Rings trilogy
have in common well they're all based on
books right false they all had economies
of
scale before we jump into it keep in
mind that economists differentiate
between the short run and the long run
in the short run at least one input or
resource in the production process is
fixed I made a video about it check it
out in this video I'm going to talk
about production in the long run when
all resources are variable let's start
by looking at what happens to Output as
a company adds more and more resources
if a firm were to double its inputs
there's only three possible things that
could happen to their output their
output could more than double it could
double or it could less than double
that's the idea of returns to scale if
output more than doubles then a firm is
experiencing increasing returns to scale
because getting bigger is better this
happens because they can use mass
production techniques that smaller firms
can't now if they output doubles then
that company has constant returns to
scale so kind of maxed out on the gains
of getting bigger and if that output
less than doubles then they're
experiencing decreasing returns to scale
and they're just too big so returns to
scale show what happened to production
in the long run but what happens to cost
well have you ever seen the TV show How
It's Made It shows how companies produce
stuff and it's absolutely fascinating
think of two bread companies with one
producing bread like this and the other
one producing bread like this now here's
the question which one of these two
companies has higher costs obviously
this one that's millions of dollars of
equipment they're using to produce the
bread so their total cost of produ
producing are way higher but what about
their average cost producing each loaf
of bread it's way lower and that's the
idea of economies a scale the long run
average costs fall as more output is
produced economies of scale is the idea
that getting bigger is cheaper it
happens because of increasing returns of
scale and other cost-saving measures
companies that are producing at a larger
scale can afford super productive
machines and also buy resources in bulk
again the total cost might be a lot
higher but the average cost is lower and
that brings us back to those movies
several the Twilight and Harry Potter
movies and all the Lord La Rings movies
were shot at the same time the total
cost of producing three movies is a lot
more expensive than just producing one
but if you produce them all at the same
time the average cost is going to fall
when they made the Lord of the Rings
they didn't have to ship their cast and
crew to New Zealand over and over and
over again so producing multiple movies
all at once meant that they had
economies of scale but often costs don't
keep falling and falling in the long run
like production they often level off and
this is called constant returns to scale
so when you're producing bread there's
just no way to get your cost below a
certain amount per Loaf and eventually
it's possible for the average cost to
start going up as more as produced
that's called diseconomies of scale in
that situation a company becomes so big
and is producing so much that they have
to hire extra managers they have to add
a cafeteria to their Factory so their
average costs start going
up bonus round now you might be thinking
that a firm wants to produce where they
have the lowest long run average cost
but it's not that simple the amount of
firm should produce doesn't just look at
cost it also looks at consumer demand I
mean think of your local pizza
restaurant the goal isn't to minimize
their cost make as much pizza as
possible their goal is to maximize
profit think about it they could have
advanced pizza making robots that do all
the work but they don't sell enough
Pizza to make it worth it the point is
Concepts like economies to scale are
ideas that help producers make decisions
they don't tell producers exactly how
much to make because in real life one
size doesn't fit all thanks for watching
until next time hey thanks for watching
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