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
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
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
Minimum efficiency scale is the smallest quantity of output at which the long run
average cost reaches