ECON 110 Lecture 14: Producers in the Long Run
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10 Nov 2015
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Econ 110 - lecture 14 - chapter 8 producers in the long run. The relationship between lrac and sratc curves. All factors are variable in the long run, including capital. Cost minimization is producing its output at the lowest possible cost. Cost minimization can be found with the following formula, where k represents capital, l represents labour, mp represents marginal product, and p represents price: Equation: mpk / pk = mpl / pl. Whenever the ratio of the marginal product of each factor to its price is not equal for all factors, there are possibilities for factor substitutions that will reduce costs (for a given level of output) In the equation above we would use the side that is the largest one. If mpk / pk is 4 while mpl / pl is 10, then we can reduce costs and produce more with the last dollar spent on labour, as it adds 10 units to output.
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