Explain if the following statement is consistent with the balance long term?: “The conditions of production in the industry are such that the average production costs are continuously decreasing for the company when its production level increases. “
In long term equilibrium the production conditions in the industry
lead to the company producing at the level where P = CMg = CMe. Y
This occurs when the average cost of production is as low as possible.
If the company finds itself with decreasing average costs of production when production increases in the long term is because the market is large enough and the number of Enough companies that lead to the condition of balance. This must happen later.
But if the company finds itself with decreasing average costs of continuously, its cost function would be of type CMe * Q = β where β. It is a constant positive value. This type of function is continually decreasing. If production goes to infinity, the CMe would be zero. The above is absurd. Companies as they increase their production first undertake the reduction of average costs by the presence of economies of scale. But at some point, the diseconomies of scale that raise average costs. In this way, the long-term average cost curve is U-shaped. Consequently the claim is not compatible with the long balance term or with the behavior of the companies in terms of the production technologies.