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Lecture 15

Lecture Fifteen: Output and Costs

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ECON 1000
George Georgopoulos

Lecture Fifteen: Output and Costs November 22, 2011 Long Run Cost In the long run, all inputs are variable and all costs are variable The Production Function The behavior of long run cost depends upon the firm’s production function As the seize as the plant increases, the output that a given quantity of labour can produce increases. As the quantity of labour decreases, diminishing returns occur for each plant. - Over time, the marginal productivity declines Diminishing Marginal Product of Capital Diminishing marginal product of capital is the increase in output resulting from one unit increase in the amount of capital employed, holding constant the amount of labour employed. A firms production function exhibits diminishing marginal returns for a given plant as well as diminishing returns to capital for a quantity of labor. For each plant, diminishing marginal product of labour creates a set of short run, U shaped cost curves for MC, AVC and ATC. Short Run Cost and Long Run Cost The average cost of producing a given output varies and depends on the firms plant. The larger the plant the greater is the output at which ATC is at a minimum. Long Run Average Cost Curve The long run average cost curve is the relationship between the lowest attainable average total cost and output when both the plant and labour are varied The long run average cost curve is a planning cure that tells the firm the plant that minimizes the cost Economies and Diseconomies of Scale Economies of scale are features of a firms technology that lead to falling long run average cost as output goes up Diseconomies of scale are disadvantages, such as an increase in cost arising from an increase in the size of an organization. Constant returns of scale are Minimum Efficiency Scale A firm experiences economies of scale up to some output level. Beyond that output level, it moves into constant returns to scale or diseconomies of scale. Minimum efficiency scale is the smallest quantity of output at which the long run average cost reaches
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