Assume a new technology is developed that increases the productivity o

Assume a new technology is developed that increases the productivity of capital and creates additional economies of scale. How would this affect the firm’s minimum efficient scale of operation. Illustrate this effect graphically.

What will be an ideal response?

ANSWER

The increase in the productivity of capital would result in a decrease in the short-run and long-run average costs of production. This is illustrated by a downward shift of both curves. In addition, the increased economies of scale implies declining long-run average costs over a greater range of output. Thus, the firm’s minimum efficient scale, i.e., the level of output at which economies of scale are exhausted, would increase. As such, the minimum point on the firm’s LRAC curve would occur at a higher level of output than before the change in technology.