Question

Explain how a variety of forces effects long-run costs: Scale, scope, learning, and Purchasing economies.

Answer 1

Answer: The economy is fueled by its forces of demand and supply and how they are met by production and cost factors in the market. Cost, to a firm is a critical factor that determines how much of an output can be produced and distributed in the market and how much of a revenue is a must to sustain the level of cost that they incur in the production of their goods and services. Cost is the amount of money that is required to produce a good or commodity and to bring it before the consumers for sale. Costs are usually variable and depend upon a large number of factors. One of the basic types of cost differentiation is its varied nature in the short run and the long run. Costs differ in the long run because in the longer run, many other factors of production and market forces change their nature and mode of operation. Let us briefly discuss some of the forces that affect the long run cost of products:

                     Scale: The scale of production is a major factor that affects the cost of the product in the longer run. When a larger quantity of a product is produced in the longer run, they all do not need to use individual factors of production to be produced, instead many products use up the same units of the factors of production, thereby bringing down the cost of production in the long run significantly. However, after a stipulated period of time, when all the factors of production are effectively utilized, their cost per product starts to increase again.

                   Scope: The scope of production is another important benchmark that determines the cost of production in the long run. Scope of production means what type of product needs to be produced and how it affects the consumer needs and demands. In the short run, scope is perhaps the most critical factor determining the cost of a production, however in the longer run, since the products are already in the market and have a significant impact on the consumers, therefore the producer can easily shape the consumer demand and supply by changing the production process thereby impacting his costs in a significant manner.

                    Learning: Learning about the product in the longer run pursues the real cost of the product by detailed information on the ground which helps to identity the loopholes in the total production process and fixing them, there by making the learning process a significant contributor to the variable cost in the long run.

                    Purchasing economies: The economies of purchasing also tilts the cost of production of a product in a significant way. If a consumer purchasing of a product is reduced due to any reason, the cost of production goes high significantly, and if the demand for the product increases thereby increasing the purchasing of the consumer, it decreases the cost of production, thereby increasing the overall profit of the consumer. This is how, purchasing affects the producer’s cost function.