Changes

Economically, long-run unit costs are always less than or equal to short-run unit costs at all levels of output Q.  If you graph unit cost on the y-axis and output Q on the x-axis, then the curve for the long run is the shape of a big bowl (or “U” with a flattened bottom): downward sloping for small Q, flat for medium Q, and then upward sloping for large Q.  That reflects the increasing returns to scale as production begins, constant returns to scale when production is medium, and then decreasing returns to scale as production becomes very large.

Economically, long-run unit costs are always less than or equal to short-run unit costs at all levels of output Q.  If you graph unit cost on the y-axis and output Q on the x-axis, then the curve for the long run is the shape of a big bowl (or “U” with a flattened bottom): downward sloping for small Q, flat for medium Q, and then upward sloping for large Q.  That reflects the increasing returns to scale as production begins, constant returns to scale when production is medium, and then decreasing returns to scale as production becomes very large.

If plotted on the same graph, the short-run unit costs would be little bowls (or “U”s) are sitting on top of the bigger curve of long run costs.  SHORT-RUN COSTS NEVER DIP BELOW LONG-RUN UNIT COSTS.  That is because short-run unit costs are always equal or greater than long-run unit costs.

If plotted on the same graph, the short-run unit costs would be little bowls (or “U”s) are sitting on top of the bigger curve of long run costs.  SHORT-RUN UNIT COSTS NEVER DIP BELOW LONG-RUN UNIT COSTS.  That is because short-run unit costs are always equal or greater than long-run unit costs.

The key to increasing returns to scale, which is whatever company owner wants, is division of labor.  Train employees to become specialists at certain functions so that they can be performed more efficiently.  Henry Ford was a master at this, training his workforce in a way that each employee was an expert at a particularized aspect of the assembly line.  The more specialized employees can become, the faster they can accomplish their task.  After a while, they could almost do their job in their sleep.  And that is a good thing, because doing the same task over and over puts one to sleep!   

The key to increasing returns to scale, which is whatever company owner wants, is division of labor.  Train employees to become specialists at certain functions so that they can be performed more efficiently.  Henry Ford was a master at this, training his workforce in a way that each employee was an expert at a particularized aspect of the assembly line.  The more specialized employees can become, the faster they can accomplish their task.  After a while, they could almost do their job in their sleep.  And that is a good thing, because doing the same task over and over puts one to sleep!