Figure

Three Possible Long-Run Average Cost Curves for a Multiplant Firm

(a) Constant costs characterize a multiplant facility that has neither economies nor diseconomies of scale.

(b) Average costs decline if a multiplant firm is more efficient than a single-plant firm. (c) The average costs of operating several plants can eventually rise when coordinating costs overcome multiplant economies.

Three Possible Long-Run Average Cost Curves for a Multiplant Firm

(a) Constant costs characterize a multiplant facility that has neither economies nor diseconomies of scale.

(b) Average costs decline if a multiplant firm is more efficient than a single-plant firm. (c) The average costs of operating several plants can eventually rise when coordinating costs overcome multiplant economies.

Output Output Output

(a) Constant costs (b) Declining costs (c) U-shaped cost curve

Output Output Output

(a) Constant costs (b) Declining costs (c) U-shaped cost curve curve can be L-shaped, as in Figure 8.6(a), if no economies or diseconomies result from combining plants. Second, costs could decline throughout the entire range of output, as in Figure 8.6(b), if multiplant firms are more efficient than single-plant firms. When they exist, such cases are caused by economies of multiplant operation. For example, all plants may use a central billing service, a common purchasing or distribution network, centralized management, and so on. The third possibility, shown in Figure 8.6(c), is that costs first decline beyond Q*, the output of the most efficient plant, and then begin to rise. In this case, multiplant economies of scale dominate initially, but they are later overwhelmed by the higher costs of coordinating many operating units.

All three shapes of cost curves shown in Figure 8.6 are found in the U.S. economy. Because optimal plant and firm sizes are identical only when multiplant economies are negligible, the magnitude of both influences must be carefully considered in evaluating the effect of scale economies. Both intraplant and multiplant economies can have an important impact on minimum efficient firm size.

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