Module 22 krugman 1
Module 22
Long–Run Costs and Economies of Scale
What’s New in the Fourth Edition?
• Updated cases
Module Objectives
• How do firms choose the optimal level of fixed cost?
• Why do costs differ in the long run compared to the short run?
• What are returns to scale and why do they matter?
Teaching Tips
Short-Run versus Long-Run Costs
Creating Student Interest
• Ask students to define “the long run”—is it a week, a month, a year, a decade? To help them see
that the long run is not tied to a specific length of time, ask them to consider the long run for a fruit
fly (for whom 48 hours is a lifetime) versus that for an elephant (with a gestation period of 22
months and a life span of more than 70 years). Then introduce the difference between opening a
• Ask students to think about two different kinds of hardware stores—the small, local, family-owned
store and the large chain stores (Lowe’s, Home Depot). What advantages do they see for each kind
Presenting the Material
• Students have difficulty grasping the difference between short-run and long-run average total cost,
especially when it comes to the graph. First remind them of the reasons why average total cost is U-
shaped. Average total cost diminishes initially because the average fixed cost is high. If a firm is
Module Outline
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I. Short-Run versus Long-Run Costs
A. The long-run average total cost curve shows the relationship between output and average total
cost when fixed cost has been chosen to minimize total cost for each level of output. This is
illustrated in text Figure 22-2, shown next.
Figure 22-2
1. In the long run, when a producer has had time to choose the fixed cost appropriate for
its desired level of output, that producer will be on the long-run average total cost curve.
2. If the output level is altered, the firm will no longer be on its long-run average total cost
B. Returns to scale
1. There are increasing returns to scale, also known as economies of scale, when long-run
average total cost declines as output increases.
2. There are decreasing returns to scale, also known as diseconomies of scale, when long-
run average total cost increases as output increases.
3. There are constant returns to scale when long-run average total cost is constant as output
increases.
4. Scale effects depend on the technology of production.
Case Studies in the Text
Economics in Action
How the Sharing Economy Reduces Fixed Cost—This EIA explains how the sharing economy reduces
fixed costs.
Ask students the following questions:
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Web Resources