Managerial Economics - Cost Analysis
Constant Returns To Scale - Cost Analysis
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In the long run if the returns to scale are constant then the average cost of production will be the same.
Constant Returns To Scale
In the long run if the returns to scale are constant then the average cost of production will be the same. For example : Ananda Vikatan magazine, started 100 years ago and it was sold in the market for 25 paise but now it is still sold at a nominal cost of Rs.15. The price increased because raw material cost and printing and labour costs have also increased but in the long run the price of the commodity has not increased much.
The
constant returns to scale curve is graphically presented below which indicates
that the LRAC is not a boat shaped curve.
From the above graph it is clear that in the long run it is possible to derive a LRAC as a straight line with constant returns to scale.
Economies
of scope: producing variety to get cost
advantage. In retail business it is
commonly used. Product diversification within the same scale of plant will help
them to achieve success.
In the long run if the returns to scale are constant then the average cost of production will be the same. For example : Ananda Vikatan magazine, started 100 years ago and it was sold in the market for 25 paise but now it is still sold at a nominal cost of Rs.15. The price increased because raw material cost and printing and labour costs have also increased but in the long run the price of the commodity has not increased much.
From the above graph it is clear that in the long run it is possible to derive a LRAC as a straight line with constant returns to scale.
Tags : Managerial Economics - Cost Analysis
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