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ECON 208 Lecture Notes - Lecture 15: Diminishing Returns, Market Structure, Demand Curve

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School
McGill University
Department
Economics
Course
ECON 208
Professor
Mayssun El- Attar Vilalta
ECON208Lecture15Chapter8and9
8.1:TheLongRun:NofixedFactors
●Inthelongrun,allinputsarevariable
●Firmsstriveforbothtechnicalefficiencyandeconomicefficiency
ProfitMaximizationandCostMinimization
●Foranylevelofoutput,maximizingprofitsrequiresfirmstochoosetheir
inputstominimizetotalcosts
●UsingKandLtorepresentcapitalandlabour,andpLandpKasthepricefor
thetwofactors,costisminimizedwhen:
ThePrincipleofSubstitution:firmsadjustthequantitiesoffactorsinresponseto
changingrelativefactorprices.
Examplesoftheprinciplesofsubstitutioninaction:
●Methodsofproducingthesameproductoftendifferacrosscountries
●Airplanesusingmorefuelefficienttechnologies
●Theuseofelectricityacrossdifferentcountries
LongRunCostCurves
●Whenallfactorsofproductioncanbevaried,considertheleastcostmethod
ofproducinganylevelofoutput.
●TheLongRunAverageCost(LRAC)curveseparatesunattainableand
attainablecostlevels,giventechnologyandfactorprices
●TheLRACcurveisusuallyUShaped
A“SaucerShaped”LRACCurve
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FallingLRAC→Increasingreturnstoscale
ConstantLRAC→Constantreturnstoscale
RisingLRAC→Decreasingreturnstoscale
●WhenoutputexceedsqM,thefirmhasrisingunitcosts.Suchanincreasing
costfirmissaidtoencounterdecreasingreturnstoscale
●Thisresultsfromeitherdifficultiesinmanagingandcontrollinganenterprise
asitssizeincreases
*Decreasingreturnstoscale(LR)isnotthesameasdiminishingmarginal
returns(SR)
TheRelationshipbetweenLRACandSRATCCurves
●AshortrunATCcurvecannotfallbelowtheLRACcurve
●EachSRATCcurveistangenttotheLRACcurveatthelevelofoutputfor
whichthequantityofthefixedfactorisoptimal
ShiftsintheLRACCurve
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