Micro CHAPTER 3.3:

CHAPTER SUMMARY

As we mentioned in 3.2, in the long-run, all costs are variable. Businesses have to make choices about what fixed costs to take on in the short-run. For example, a restaurant has to choose whether to be delivery only (lower fixed costs), have a small dining location (medium fixed costs), or have a large dining location (higher fixed costs). Each of these choices would produce a different ATC curve. Because these curves are each tied to a short-run fixed cost associated with the different options, they are called Short-Run Average Total Cost (SRATC) curves. The chart below shows three different SRATCs, each one representing one of the three options.

In theory, there is an infinite number of SRATCs depending on the different choices a business makes about fixed costs. When we combine all the SRATCs together, they create a curve called the Long-Run Average Total Cost (LRATC) curve, which represents the ATC curve in the long-run, when all costs are variable.

Every Long-Run Average Total Cost (LRATC) curve starts with a downward slope due to economies of scale - the efficiencies that a business gets from growing in size of production, which shows up as a falling LRATC. It eventually starts rising due to diseconomies of scale - the additional costs that a business has to deal with when it grows too much, which shows up as a rising LRATC. In between these two parts of the curve, we have constant returns to scale, where the economies and diseconomies are equal to one another, so the LRATC is flat.

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