This is an absolute deal breaker. This is by far the best explanation of how to derive LRAC from SRACs. I will share this with my UG students. Thanks a million !!
Thank you fellow teacher! Sometimes the videos come out on-point (not always but I try 😅) and I was happy with this one. Good luck to your class, the students sound like they’re in good hands 😎🙏👍
It was hard finding a good source for this to understand. This is probably the best video that explains this so simply and yet so thoroughly. It looked scary at first but you made it easy. THANK YOU. You're a great teacher. I'm sure you bring nothing but positive externalities to this world.
Glad it was helpful! Thanks so much for your comment, you are too kind 🙏😊 indeed economics can look scary, but mostly it’s all bark no bite if you get my drift…
You are by far the best economics teacher. I never thought I would have the opportunity to say this to someone but your explanations are even clearer than khan academy's. Thank you very much!
Great video but is there a difference between productive efficiency in the long run vs productive efficiency in the short run? Is a firm that produces at the min of srac productively efficient in short run while a firm that produces on any point on lrac is productively efficient in the long run?
Really good question, I find this stuff really difficult. Some texts identify productive efficiency with technical efficiency, some use a broader definition (I think… it’s so confusing), so even on definitions alone I find this area problematic. Best to ask your teacher/ check textbook. In my experience more advanced texts take LR equilibrium to be at min LRAC, and this is what it is to be productively efficient. More beginner texts don’t seem to differentiate between LRAC and SRAC, they just say P= min AC in the LR, and they sometimes say this is productive efficiency… hope this helps, sorry I don’t know the proper answer!
Nice video ma'am. I have a question though....why are the subsequent SRACs after the first positioned the way they are? For example, why is SRAC2 below SRAC1. Please respond soon
Really good question. The short answer is that it doesn't have to, but we usually show it this way because it gives the LRAC curve a 'u' shape that has some properties that some economists find attractive. The downward sloping section (economies of scale) is often explained as follows: as firm output increases inputs to production are able to specialise (become more efficient). Alternatively, at larger scales the firm can often get discounts on our inputs to production (bulk discounts). Both effects will reduce average total costs. In some texts the downward sloping section is linked to the firm exhibiting increasing returns to scale. This would be true if the technology used to make the good was such that for any proportionate increase in the inputs, output increases more than that proportion. For instance if we double all of the inputs then we would get than double the output back. The upward sloping part (diseconomies of scale) is harder to rationalise and in different text books you see different sorts of explanations. Some texts relate the upward sloping portion of the LRAC (diseconomies of scale) to decreasing returns to scale (RTS). I find this less convincing since it would mean that the firm’s technology has changed in such a way that the production function now exhibits decreasing returns to scale (imho... why would the technology change to make things more expensive on average if we increase all inputs by some proportion??). The only thing I can think of is that perhaps it is hard to organise large scale firms, which means that the firm becomes inefficient and each marginal unit becomes more expensive. Other authors give different accounts. Varian - probably one of the more common intermediate text books attributes the u shape of LRAC to the presence of 'quasi-fixed' factors. From what I can tell, what Varian means here is that these inputs to production are 'fixed' in the sense that the firm only has a fixed amount of them (they don't vary with Q). In this sense, eventually these quasi fixed factors will lead to rising average costs as they are constrained in the same way fixed factors of production in the short run leads to rising (SR)MC and rising (SR)ATC -I'm guessing from what I gauge the text, Varian is not super clear here (I have a video on firm SR costs that explains this if you are confused). But, these quasi fixed factors are not sunk - so the firm only has to pay them if they produce some positive amount so it's not like a constraint in the short run where the firm has no choice but to have them in the particular level that has already been paid for. It's just that we need (have) them in a fixed amount. It's worth noting that the cost associated with them will be a fixed amount, and this will give us the downward sloping section as well of LRAC as well. I find Varian a bit hard to interpret here, but reading between the lines maybe this is what he might mean - as the firm expands they are going to hit some sort of constraint on their expansion (eventually). There is only so much land available, or water, or labour: nothing is infinite, and so once one of these is exhausted, it becomes 'fixed' in a sense (we call this 'quasi-fixed'). Our other factors of production then have to work around this constraint and LRMC and therefore LRAC increases. This interpretation is intuitive to me, but I think i've probably even read too much into Varian here. This argument is under section 22.5 Long-Run Costs 9th edition of Varian if you want to ever have a look. I think most texts don't offer this kind of explanation because we're in the long run and any sort of mention of constraint will just confuse students (since the defining difference between SR and LR is that all inputs are variable so there are no constraints... ). So that's a lot, but those are my thoughts, explanations do differ across different texts... Very sorry I can't offer a more simple response, hope it helped. Edit: Sorry about the edit, it’s a topic I’ve thought about before so I have lots of thoughts, my first version was jumbled.
Related to your first argument with the upward sloping part, Becker says in his book that there is one factor that is finite, the owner of the firm. Contracted managers are involved in principal agent issues, so the productivity of the owner it's not replicable. You can sell part of your company but small shareholders have less incentives than one single owner to control and work in the company. PD: you are the best explaining microeconomics and your videos are so useful and clears.
@@sannti741 I didn't know that! If you have time, which book was it? Creating the videos on this stuff is actually really interesting, because if you look at different texts often they differ (ever so slightly sometimes!) in their treatments and explanations. Sometimes we treat our models in economics as if there is only one true correct account, but actually you can get (slightly) different variations and different authors stress different things. I don't take this as problematic, just as interesting, but I do feel like if we don't acknowledge it, we miss out on acknowledging that working with models can be hard, it can be interpretative, and should be done with care. It's not just maths. Thanks for the nice comment by the way! Made my day :)
@@econhelp_official it is "Economic Theory" by Gary Becker. This book has a lot of useful interpretations slightly differents. He start the book showing that is possible to get the same conclusion of the traditional consumtion problem but just with the budget constraint, the preferences are not necessary (adding some additional assumptions). Continue making videos, you are the best :)
Really great video which i desperately needed because my lecture notes didnt explain this at all 😭 by any chance would you have any video examining LRAC and SRAC shifts when a firm uses cost cutting strategies? I'm really confused as to which one shifts when the firm reduces its own cost because i keep getting different answers 😞
@@ЕгорИванов-т6г good question and nope, absolutely not. Min sr atc does not need to be on lrac and lrac does not consist of only min srac. Actually it’s only at the minimum of lrac that they will definitely be tangent. I should make a video on this point. I will put this on my list of videos to do, but feel free to email me on econmathhelp@gmail.com if you want more discussion/help or you can answer here too 😀
@@ЕгорИванов-т6г So one interesting story about this topic is here conversableeconomist.blogspot.com/2019/12/the-story-of-viners-draftsman.html#:~:text=Viner's%20draftsman%20was%20a%20mathematician,in%20the%20figure%2C%20AC). There are really two points, the first is why SRAC is (typically) not at a minimum when it hits LRAC, and an easy response is because there is no conceptual requirement for that to be the case (there is a more thorough response which involves a discussion about minimisation and tangency, that's a longer topic, but just noting that there is no conceptual requirement for that to be the case might help). Except at the minimum of the LRAC, and to say this another way, where the LRAC is perfectly horizontal. At this point it is conceptually impossible for the SRAC curve to be at any other point other than its minimum. This is a conceptual necessity; since the minimum of the LRAC is the lowest possible ATC when all factors are variable. If SRAC was anywhere else than it's minimum at this point that would be a direct contradiction. Does that help at all?
It’s 7, the labelling is just poor, I did the best I could sorry. To see it clearer count from the right hand side back. The furthest is 8, second furthest is 7, that’s the lowest srac associated with q**.
This is an absolute deal breaker. This is by far the best explanation of how to derive LRAC from SRACs. I will share this with my UG students. Thanks a million !!
Thank you fellow teacher! Sometimes the videos come out on-point (not always but I try 😅) and I was happy with this one. Good luck to your class, the students sound like they’re in good hands 😎🙏👍
It was hard finding a good source for this to understand. This is probably the best video that explains this so simply and yet so thoroughly. It looked scary at first but you made it easy. THANK YOU. You're a great teacher. I'm sure you bring nothing but positive externalities to this world.
Glad it was helpful! Thanks so much for your comment, you are too kind 🙏😊 indeed economics can look scary, but mostly it’s all bark no bite if you get my drift…
You are by far the best economics teacher. I never thought I would have the opportunity to say this to someone but your explanations are even clearer than khan academy's. Thank you very much!
Wow that's so cool! You're so lovely, thanks so much xxxoooo
You are an angle! The best video for LRAC & SRAC!
That's so nice thanks! Good luck with your study!
I loved that your words about transformation of short run to long run average total cost curves
Thank-you! That's really nice, hope you have a great day! :)
@@econhelp_official thanks for your kindness I Hope you have awesome day
Was very helpful at the 11th hour of my assignment. ❤
Aw nice! Hope your assignment went well!
You nailed it. Very useful and understandable 👍
It's so special to hear a compliment from professional teachers, thanks so much!
Thank you for this nice nice vid madam, it was so much help for me. looking forward to exploring more vids on your page :D
That's so lovely of you to say! Thank you so much and I hope that you do well in your studies. Hopefully I can get more videos up soon :)
Your videos are really well done and you're great at explaining this stuff. Thanks!
Thanks! I really like doing the videos and the comments help me, thanks so much!
Thank you for the clear explanation. I'm always wondering the mathematical basis for my A-level economics and your video just answers my doubts.
You're welcome! Good to know my video is relevant for the A-levels! Thanks for the comment :)
Great video but is there a difference between productive efficiency in the long run vs productive efficiency in the short run? Is a firm that produces at the min of srac productively efficient in short run while a firm that produces on any point on lrac is productively efficient in the long run?
Really good question, I find this stuff really difficult. Some texts identify productive efficiency with technical efficiency, some use a broader definition (I think… it’s so confusing), so even on definitions alone I find this area problematic.
Best to ask your teacher/ check textbook. In my experience more advanced texts take LR equilibrium to be at min LRAC, and this is what it is to be productively efficient. More beginner texts don’t seem to differentiate between LRAC and SRAC, they just say P= min AC in the LR, and they sometimes say this is productive efficiency… hope this helps, sorry I don’t know the proper answer!
this is a great video, thank you so much !
I'm so glad it was helpful! Thankyou for the lovely comment, I hope that your study goes well!
Great video, well done and thanks!
You’re welcome! I’m so glad that you liked it!! 😀
great thanks for your detail explanation
Glad it was helpful!
Commenting for the algorithm ❤️
😊 This made me feel so appreciated! You're the best, thanks for the support!! xx
Thank you! This video helped me very much
I'm so glad to hear that! Thanks so much for the comment! ❤️
Nice video ma'am. I have a question though....why are the subsequent SRACs after the first positioned the way they are? For example, why is SRAC2 below SRAC1. Please respond soon
Really good question. The short answer is that it doesn't have to, but we usually show it this way because it gives the LRAC curve a 'u' shape that has some properties that some economists find attractive.
The downward sloping section (economies of scale) is often explained as follows: as firm output increases inputs to production are able to specialise (become more efficient). Alternatively, at larger scales the firm can often get discounts on our inputs to production (bulk discounts). Both effects will reduce average total costs.
In some texts the downward sloping section is linked to the firm exhibiting increasing returns to scale. This would be true if the technology used to make the good was such that for any proportionate increase in the inputs, output increases more than that proportion. For instance if we double all of the inputs then we would get than double the output back.
The upward sloping part (diseconomies of scale) is harder to rationalise and in different text books you see different sorts of explanations. Some texts relate the upward sloping portion of the LRAC (diseconomies of scale) to decreasing returns to scale (RTS). I find this less convincing since it would mean that the firm’s technology has changed in such a way that the production function now exhibits decreasing returns to scale (imho... why would the technology change to make things more expensive on average if we increase all inputs by some proportion??). The only thing I can think of is that perhaps it is hard to organise large scale firms, which means that the firm becomes inefficient and each marginal unit becomes more expensive.
Other authors give different accounts. Varian - probably one of the more common intermediate text books attributes the u shape of LRAC to the presence of 'quasi-fixed' factors. From what I can tell, what Varian means here is that these inputs to production are 'fixed' in the sense that the firm only has a fixed amount of them (they don't vary with Q). In this sense, eventually these quasi fixed factors will lead to rising average costs as they are constrained in the same way fixed factors of production in the short run leads to rising (SR)MC and rising (SR)ATC -I'm guessing from what I gauge the text, Varian is not super clear here (I have a video on firm SR costs that explains this if you are confused). But, these quasi fixed factors are not sunk - so the firm only has to pay them if they produce some positive amount so it's not like a constraint in the short run where the firm has no choice but to have them in the particular level that has already been paid for. It's just that we need (have) them in a fixed amount. It's worth noting that the cost associated with them will be a fixed amount, and this will give us the downward sloping section as well of LRAC as well. I find Varian a bit hard to interpret here, but reading between the lines maybe this is what he might mean - as the firm expands they are going to hit some sort of constraint on their expansion (eventually). There is only so much land available, or water, or labour: nothing is infinite, and so once one of these is exhausted, it becomes 'fixed' in a sense (we call this 'quasi-fixed'). Our other factors of production then have to work around this constraint and LRMC and therefore LRAC increases.
This interpretation is intuitive to me, but I think i've probably even read too much into Varian here. This argument is under section 22.5 Long-Run Costs 9th edition of Varian if you want to ever have a look.
I think most texts don't offer this kind of explanation because we're in the long run and any sort of mention of constraint will just confuse students (since the defining difference between SR and LR is that all inputs are variable so there are no constraints... ).
So that's a lot, but those are my thoughts, explanations do differ across different texts... Very sorry I can't offer a more simple response, hope it helped.
Edit: Sorry about the edit, it’s a topic I’ve thought about before so I have lots of thoughts, my first version was jumbled.
Related to your first argument with the upward sloping part, Becker says in his book that there is one factor that is finite, the owner of the firm. Contracted managers are involved in principal agent issues, so the productivity of the owner it's not replicable. You can sell part of your company but small shareholders have less incentives than one single owner to control and work in the company.
PD: you are the best explaining microeconomics and your videos are so useful and clears.
@@sannti741 I didn't know that! If you have time, which book was it? Creating the videos on this stuff is actually really interesting, because if you look at different texts often they differ (ever so slightly sometimes!) in their treatments and explanations. Sometimes we treat our models in economics as if there is only one true correct account, but actually you can get (slightly) different variations and different authors stress different things. I don't take this as problematic, just as interesting, but I do feel like if we don't acknowledge it, we miss out on acknowledging that working with models can be hard, it can be interpretative, and should be done with care. It's not just maths. Thanks for the nice comment by the way! Made my day :)
@@econhelp_official it is "Economic Theory" by Gary Becker. This book has a lot of useful interpretations slightly differents. He start the book showing that is possible to get the same conclusion of the traditional consumtion problem but just with the budget constraint, the preferences are not necessary (adding some additional assumptions). Continue making videos, you are the best :)
Madam please don't stop such lovely video ❤❤😊
Awwwww you’re so sweet! Thanks for the comment!
Really great video which i desperately needed because my lecture notes didnt explain this at all 😭 by any chance would you have any video examining LRAC and SRAC shifts when a firm uses cost cutting strategies? I'm really confused as to which one shifts when the firm reduces its own cost because i keep getting different answers 😞
I would think both shift down by the same smount? Does that work?
Here are some videos on Mixed Strategies: ua-cam.com/video/zVyfoDRcT0I/v-deo.html ua-cam.com/video/MIJB6tY8BR8/v-deo.html Good luck with your study!
This is great thank you
very helpful Thank you very much!!
You're welcome! Thanks for the comment and good luck with your study!
The video is on point.
Thank you 🙏!
Best explanation
Glad you think so! Thanks so much for the comment!
@econhelp44 Does every SRAC touch LRAC at its minimum point?
@@ЕгорИванов-т6г good question and nope, absolutely not. Min sr atc does not need to be on lrac and lrac does not consist of only min srac. Actually it’s only at the minimum of lrac that they will definitely be tangent. I should make a video on this point. I will put this on my list of videos to do, but feel free to email me on econmathhelp@gmail.com if you want more discussion/help or you can answer here too 😀
@econhelp44 I am eager for the video on this topic! I'll try to sort it out myself and then might write to you to verify guesses. Thanks!
@@ЕгорИванов-т6г So one interesting story about this topic is here conversableeconomist.blogspot.com/2019/12/the-story-of-viners-draftsman.html#:~:text=Viner's%20draftsman%20was%20a%20mathematician,in%20the%20figure%2C%20AC). There are really two points, the first is why SRAC is (typically) not at a minimum when it hits LRAC, and an easy response is because there is no conceptual requirement for that to be the case (there is a more thorough response which involves a discussion about minimisation and tangency, that's a longer topic, but just noting that there is no conceptual requirement for that to be the case might help). Except at the minimum of the LRAC, and to say this another way, where the LRAC is perfectly horizontal. At this point it is conceptually impossible for the SRAC curve to be at any other point other than its minimum. This is a conceptual necessity; since the minimum of the LRAC is the lowest possible ATC when all factors are variable. If SRAC was anywhere else than it's minimum at this point that would be a direct contradiction. Does that help at all?
Many thanks!!!!
You're welcome! Thanks for the comment :)
I think you meant for Q** the best is SRAC 6 (not 7)
It’s 7, the labelling is just poor, I did the best I could sorry. To see it clearer count from the right hand side back. The furthest is 8, second furthest is 7, that’s the lowest srac associated with q**.