hey welcome back so this is the last of our lectures for uh this chapter so we're gonna talk about the long run and to be honest we do less work in the long run in this course and the real simple reason is because the long run the math is more complicated than the short run stuff but i'm still going to address it here so i'm going to show you and this kind of speaks to why the math is so hard because it's going to look a little complicated so i'm going to show you uh how we think about cost in the long run here and it's going to look complicated and so i just want to stress before i get started that you're never going to have to derive this you're never going to have to recreate the drawing that i create for you here because it is complicated but i want you to understand the conclusion that's it that's all i want you to understand is understand what you're going to get we can hear the term economies of scale diseconomies of scale etc okay so the long run is it necessarily a set length of time just long enough that all costs are variable remember that for my first um lecture or first or second video so we said rent was a fixed cost and that's true because in the short run you have to pay the rent but in the long run you can move you can buy a new building expand operation etc your lease can run out so we're going to think about a short run average total cost curve just like the one we developed in the previous lectures as being an option in the long run okay so in the long run that average total cost curve that's one of our choices we can keep our building the same size we can stay in the same place and that average total cost curve is one of our choices we could also expand to another location we could have two clip joints we'd get a bigger building we could downsize et cetera these are all going to be our options so long run we're going to consider these different options okay so now here's my drawing okay so i'm going to start by putting some axes here because it's going to be a graph okay and so on this axis is going to be cost and on this axis is going to be uh output or quantity okay and so that's i mean this is exactly what we did beforehand with our with our cost curve that i showed you and so here's an average total cost curve let's say this is the same one we just did in our previous example that's our average total cost curve and that's the average total cost curve if we keep the the the clip joint operation the same so let's call this the average total cost curve for the medium-sized operation so m for medium we're we could expand our operation we could the clip joint could be bigger we can have another building we have a bigger building so what if we choose the large version of the operation well if we do we've got to take this average low cost curve and throw it away this average total cost curve represents our decisions not changing so if we want to think about what it would look like to expand we need to think about what the average total cost would look like at a higher quantity so i'm going to draw another average total cost curve to change colors so maybe it looks like this notice that i'm at a higher quantity here so this is the average total cost curve actually i want to do in the middle there sorry so this is my average total cost curve for my large operation i also could have got smaller that's an option so maybe my average fuel cost curve would look like this this is my average total cost curve i got smaller went moved to a smaller building okay maybe large isn't big enough for me maybe i want to go bigger maybe i want to go and have my extra large version of the clip joint where i moved to a giant hair cutting warehouse i don't know this is the extra large version or maybe i want to open up clip joints all over town and so maybe i have a jumbo version going on this is the average total cost in my jumbo version i guess i'll just put a j we know that stands for jumbo right so you get the point the hopefully on the phone the point is there's not one average full cost curve when we're talking about the long run we're talking about the long run it's a choice between different short run average total cost curves so in the long run you have some big decisions to make you can enter a new lease you can buy a new building and once that choice is made once you've made your choice well now within that choice we have the same options we had in the last lecture we're about how many people we can hire to cut hair how many what our profits gonna look like we're in the short run realm again so a long run decision is deciding from a set of short run decisions okay now if i want to sort of say all right that's all well and good but what does it a long run curve look like well i'm going to do something like this first let's think about this let's think about how many haircuts i decide i want to get or i want to i want to perform how many haircuts i want my business to have you know maybe i want a few maybe i want to a lot i don't know but that's how profit maximizing works you decide about you have to make a decision about how big a company you want so let's say you're deciding uh this one right here well that's the case how big is your operation gonna be is gonna be medium or large because what happens here is if i follow up i can see that i could have that many haircuts in my large operation or i could have that many haircuts in the medium operation they're both options so what do i know which one do i choose you choose the large hopefully that's clear if not you don't understand what the graph is saying which i get it's complicated i'm going a little fast this is the cost so this is saying that for this many haircuts it's cheaper to do it at a large plant than it is a smaller plant and i say plant because that's just a term we use for firms in this cast in this a barber shop and it's cheaper to do this in a larger barber shop okay so this could be in that like 80 84 from our last example we're really getting we're squeezing in tight at that point if we're if we're uh we're in our medium operation so maybe getting an extra chair in there means you could you could uh get 80 haircuts with fewer barbers or something like that what about right here will we follow up looks like for this one it's cheaper to do at the medium factory again factory plant barbershop so the moral the story is areas like this are irrelevant areas like this are irrelevant because you would never produce here if you want this few haircuts you would use the small factory barber shop so the only part of the medium barbershop that matters is this bottom here in math we call this the lower envelope of these graphs so the way i'm going to do is i'm going to highlight this right here this is what my long run average cost curve looks like my long run average cost curve looks like the bottoms of every short run average cost curve now here's the thing is i just drew five cost curves here i could have drawn more who says there's only five options so there's maybe there's another one here maybe another one here here so now let me clear my drawing and move on to the ones that are drawn by a computer here are all my short run average average cost curves here's the lower envelope of them we we sort of just fill in the general shape because we know there's more options right here that just aren't being drawn so in the long run we have this overall shape and i'm going to bold it here so so it's a little more clear it goes down at first flattens out and goes up at first so why is that the case well this is because of what's called a consistent scale in dis economies of scale an assumption we make in economics is that firms in the long run are going to at low levels of production face what's called economies of scale which is a term you've already heard in this class back in chapter one economies of scale says as you scale up your operation your average total costs decline as you scale up your operation you become more efficient as you scale up your operation you can do things cheaper this is why walmart can sell things cheaper than a mon paw hardware store because as your operation gets bigger you can do things cheaper eventually that wears out so eventually you no longer have economies of scale you have what's called constant returns to scale constant returns to scale says that you've gotten me you made your your uh your operation bigger your costs are your average costs are going to stay relatively the same eventually firms can be too big eventually firms are so big that's that things like oversight costs become so expensive that you have what's called diseconomies of scale diseconomies of scale says that if you kept getting bigger and bigger and bigger at some point it would become less efficient and average total cost would go up so let's just go over this real quick economic theory tells us that as firms increase the scale of their operations selling more units the cost per unit goes down or average total cost falls this is called economist scale the columns of scale can occur because buying or transportation and bulk can be cheaper where large operations have more negotiating power this conjugate scale is visible in that downward sloping portion of the long run average cost curve when economies of scale begin to wear out the long run average cost curve flattens and companies observe what's called constant returns to scale where producing has little to no impact on average costs and eventually if you kept getting bigger and bigger management costs may increase our firm may witness disaccharides of scale so disciplines of scale can go because of substance management costs or just because with that larger operation it can be hard to oversee and make sure there's no waste or no loss and so we do think disciplines of scale can exist as companies get too big okay and that's why you have that upward sloping portion of the average total cost curve that's it for chapter seven let me know if you have any questions and this is going to take us into chapter eight where we're going to use this stuff to learn how firms maximize profit in a perfect competition to shave i didn't realize that