What Happens to Average Costs in the Long Run ?

In the following example , calculate what has happened to the average cost of producing boxes of chocolates in each company as they moved from year 1 to year 2 .


The ACE Company
The BOOM Company
The Crickey Company
Year 1
Total cost of all inputs
£10000
Total product 10000
Average Cost £1

Year 1
Total cost of all inputs
£12000
Total product 12000
Average cost £1

Year 1
Total cost of all inputs
£9000
Total product 9000
Average cost £1
Year 2
Total cost of all inputs
£20000
Total product 25000
Average cost ?
Year 2
Total cost of all inputs
£24000
Total product 20000
Average cost ?
Year 2
Total cost of all inputs
£18000
Total product 18000
Average cost ?



Q.2. Which of the firms above has experienced falling average costs ?


Q.3. Which of the firms has experienced no change in average costs ?



The example shows that a firm’s average cost can increase , decrease or remain constant as it increases its scale of production in the long run .