ECON1101 Chap.9 Long-Run Costs and Producer Surplus
Long-Run Costs and Producer Surplus
Long-Run Costs and Producer Surplus covers costs when every input can change and the surplus sellers earn. Long-run average total cost is the envelope of short-run curves for different plant sizes; it falls with economies of scale from specialisation, rises with diseconomies of scale from coordination problems, and bottoms out at the minimum efficient scale.
Producer surplus is revenue minus the sum of marginal costs, the area above supply and below price, and it is maximised at the same output that maximises profit. The drills cover naming scale effects from a firm’s cost figures and adding several sellers before measuring market producer surplus.
What this chapter covers
- 01
Short-run versus long-run cost
- 02
The long-run average cost envelope
- 03
Economies and diseconomies of scale
- 04
Minimum efficient scale
- 05
Producer surplus as price minus marginal cost
- 06
Producer surplus, variable cost and profit
Worked example · free
Producer surplus from Nina’s cake costs
- 1She sells while price covers marginal cost: the first three cakes ($4, $6, $8); the fourth at $11 would lose money.
- 1Revenue = 3 × $10 = $30.
- 1Variable cost = 4 + 6 + 8 = $18, the sum of marginal costs.
- 1Producer surplus = 30 − 18 = $12, the same as (10 − 4) + (10 − 6) + (10 − 8).
Key terms
- Economies of scale
- Economies of scale are falls in long-run average cost as a firm increases output.
- Minimum efficient scale
- Minimum efficient scale is the smallest output at which long-run average total cost reaches its minimum.
- Producer surplus
- Producer surplus is the price received minus marginal cost, summed over all units sold.
- Constant returns to scale
- Constant returns to scale describe a range of output over which long-run average cost does not change.
- Diseconomies of scale
- Diseconomies of scale are rises in long-run average cost as output grows, linked to coordination problems in large organisations.
Long-Run Costs and Producer Surplus FAQ
Why does the long-run average cost curve lie below the short-run curves?
In the long run the firm can choose the plant size that makes any given output cheapest. Each short-run curve is tied to one plant, so the best choice across all plants is never more expensive than any single one.
What causes diseconomies of scale?
The course attributes them to coordination problems in large organisations: as a firm grows, managing communication, monitoring and decisions becomes harder, which raises average cost at high output.
How is producer surplus related to profit?
Producer surplus is revenue minus variable cost. Profit subtracts fixed cost as well, so profit equals producer surplus minus fixed cost, and both are maximised at the output where price equals marginal cost.
Are diminishing returns and diseconomies of scale the same thing?
No. Diminishing returns describe the short run, when extra labour is added to a fixed plant. Diseconomies of scale describe the long run, when every input, including the plant, has grown.
How do I calculate producer surplus from a supply schedule?
For each unit sold, subtract its marginal cost from the price and add the differences, including only units whose marginal cost does not exceed the price. Equivalently, take total revenue and subtract the sum of the marginal costs of the units sold, which is their variable cost.
What is minimum efficient scale used for?
It marks the smallest output at which a firm reaches the lowest long-run average cost. Firms producing less than that are at a cost disadvantage, so the minimum efficient scale helps explain how large firms in an industry need to be and why entrants often start big.
Exam move
Sketch the long-run envelope with three short-run curves and label economies of scale, constant returns and diseconomies, then write the cause of each in one line. For producer surplus, practise both forms: unit-by-unit from a marginal cost schedule and as a triangle from a linear supply curve, checking against revenue minus variable cost each time.
For producer surplus, always state which method you used, the triangle or the step sum, and confirm it with revenue minus variable cost before moving on. A final quick test: explain why a firm can have positive producer surplus and still report a loss.
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