ECON 208 Lecture Notes - Diminishing Returns, Economic Efficiency, Technological Change

• School: McGill University
• Department: Economics (Arts)
• Course: ECON 208
• Professor: Sebastien Forte

Document Summary

In the long run, all inputs are variable. Firms strive for both technical efficiency and economic efficiency. Technical efficiency relates to trade offs between labour and capital. 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, pl and pk as the price for the two factors, cost is minimized when: Mpk = mpk or mpk = pk pk pl mpl pl. The long run average cost curve (lrac) separates unattainable and attainable cost levels, given technology and factor prices. The lrac curve is usually u shaped. Lrac curve and atc curve look alike but are different. Falling lrac = increasing returns to scale (economies of scale) Constant lrac = constant returns to scale. Rising lrac = decreasing returns to scale (diseconomies of scale)