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CHAPTER 22
LONG-RUN COSTS
Remember: All costs in the long run are variable! The behavior of long-run cost depends on the firms production function which is the relationship between the maximum output attainable and the quantities of both labor and capital.
DIMINISHING RETURNS
Diminishing returns occur at all the quantities of capital as the quantity of labor increases. The marginal product of labor eventually diminishes.
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Each short-run ATC curve is U-shaped. For each short run ATC curve, the larger the plant, the greater is the output at which average total cost is a minimum.
LONG-RUN AVERAGE COST CURVE The long-run average total cost curve is the relationship between the lowest attainable average total cost and output when both the plant size and labor are varied.
The long-run ATC curve is a planning curve. It tells the firm the plant size and the quantity of labor to use at each output to minimize cost. Once the plant size is chosen, the firm operates on the shortrun curves that apply to that plant size.
The long-run ATC curve is a planning curve. It tells the firm the plant size and the quantity of labor to use at each output to minimize cost. Once the plant size is chosen, the firm operates on the shortrun curves that apply to that plant size.
ECONOMIES OF SCALE
Economies of Scale result from features of a firms technology that lead to falling long-run average cost as output increases. The main source of economies of scales is greater specialization of both labor and capital.
ECONOMIES OF SCALE
With given input prices, economies of scale occur if the percentage increase in output exceeds the percentage increase in all inputs.
DISECONOMIES OF SCALE
Diseconomies of Scale lead to rising long-run average cost as output increases. The main source of diseconomies of scale is the difficulty of managing a very large enterprise. The larger the firm, the greater the challenge of organizing it and the communicating both up and down the management levels and among managers. Eventually, management complexity brings rising average cost.
EXAMPLE
Well do exercise 10 from your worksheet here in class together, in your notebook, and determine both graphically and algebraically, where Cathy encounters economies of scale!