Identifying Companies on the Downward-Sloping Portion of the Long-Run Average Cost Curve in Electric Scooter Manufacturing

When examining the monthly output of five companies in the electric scooter manufacturing industry, it’s crucial to understand which companies are operating efficiently. The key metric here is the Minimum Efficient Scale (MES), which is a monthly output of 27,000 electric scooters. The industry also features a typical U-shaped long-run average cost (LRAC) curve, indicating that companies will experience economies of scale up to a certain point before diseconomies of scale set in, with no constant returns to scale in between.

Understanding the U-Shaped Long-Run Average Cost Curve

In this industry, the long-run average cost curve is U-shaped. This curve starts high, slopes downward as companies achieve economies of scale, reaches a minimum point, and then slopes upward as diseconomies of scale occur. Given this structure, identifying which companies are on the downward-sloping portion of this curve involves understanding where their output stands relative to the MES.

Identifying Companies Below MES

Since the MES is 27,000 units, companies producing fewer than 27,000 electric scooters per month are on the downward-sloping portion of the LRAC curve. This means these companies are still experiencing decreasing costs with increased production and have not yet reached the minimum point of their cost curve.

Why Output Below MES Matters

Operating below the MES means that the company has the potential to lower its average costs further by increasing its output. This is a beneficial position as it suggests room for expansion and improved profitability through enhanced economies of scale.

Conclusion

To summarize, in the context of the electric scooter manufacturing industry with a MES of 27,000 electric scooters per month, any company with a monthly output below this threshold is on the downward-sloping portion of the long-run average cost curve. This positioning indicates that these companies have not yet optimized their production capacity and could still achieve lower average costs with increased output.