Question

There are over 5,000 banks in the United States—more than 10 times more per person than in other industrialized countries. A recent study suggests that the long-run average cost curve for an individual bank is relatively flat. If Congress took steps to consolidate banks, thereby reducing the total number to 2,500, what would you expect to happen to costs within the banking industry?

Please provide a detailed explanation in terms of what long-run average cost curve for the individual bank which is relatively flat means.What were the costs of the banks/banking industry previously and what will be the effects of costs on the overall banking industry.

Answer 1

The long run average cost curve is relatively flat because of the fac that the cost reduces as quantity of goods increases (in this case, number of customers increases). The banks have no additional cost associated with every additional customer because each bank functions far below their total capacity of customers. This is because there are so many banks and the total customers are divided among all these banks.

If the Congress took steps to consolidate banks, thereby reducing the total number of banks, then each bank will have more customers in its share. This will increase their costs, as now the number of customers with each bank will be reaching its total capacity. The banks incur costs for the services it provides to each of its customers as variable, but there are certain costs that are shared, such as certain fixed and sunk costs which have already been incurred. When the number of customers increase, these variable components of the cost increases. Hence, with more customers, the bank will face a more u-shaped curve rather than a flat one.