Economics Essay Example | Topics and Well Written Essays - 750 words - 9

Economics - Essay Example To enhance our perception of the situation let us first brush up on the underlying economic concepts. First consider the difference between the economic short run and long run. The short run is defined as that period of time in which at least one input of production is fixed while the long run is defined as the time frame over which all factors of production are variable. A simple way to distinguish would be to consider the shifts in the scale of production. In the short run the scale of production is fixed. A particular scale of production is represented by a short run average cost curve. Again in the long run the scale of production varies. The Long run average cost curve is an envelope of the infinite number of short run average cost curves. However it is critical to note that the Long run average cost curve by no means an envelope of the minimum points of the short run average cost curves. The individual short run optimums are the minimum points of the short run average cost curv es but in the long run the optima vary as the scale of production itself is now variable. The Long run average cost curve is U shaped under traditional assumptions. The falling part is explained by reduction in per unit cost with all factors variable due to efficiency gains of expanding the scale. These are known as scale economies1. Again the upward rising portion is explained by per unit long run cost rises due to decline in efficiency and is known as diseconomies of scale2. Let us now consider the situation of Engines R Us. In the given situation it produces at the minimum efficient scale of production. The minimum efficient scale of production refers to the minimum amount a firm can produce that minimises its long run average costs (Varian, 1990). For a continuous and U shaped long run average cost curve, the minimum efficient scale of production is the output level that corresponds to its minimum