Chapter 8 Producers in the Long Run.docx

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3 Feb 2013
3.1 Chapter 8 Producers in the Long Run (pg. 175)
There are no fixed factors in the long run. Profit maximizing firms choose from the available alternatives
the least-cost method of producing any specific output.
Profit-maximizing firms must minimize the cost of producing any given level of output. The condition for
cost minimization is
MPK = pK
MPL = pL
The principle of substitution states that, in response to changes in factor prices, profit-maximizing
firms will substitute toward the cheaper factors and substitute away from the more expensive factors.
A long-run cost curve represents the boundary between attainable and unattainable costs for the given
technology and given factor prices.
The shape of the LRAC curve depends on the relationship of inputs to outputs as the whole scale of a
firm’s operations changes. Increasing, constant, and decreasing returns lead, respectively, to decreasing,
constant, and increasing long-run average costs.
The LRAC and SRATC curves are related. Each SRATC curve represents a specific plant size and is
tangent to the LRAC curve at the level of output for which that plant size is optimal.
LRAC curves shift upward or downward in response to changes in the prices of factors or changes in
technology. Increases in factor prices shift LRAC curves upward. Decreases in factor prices and
technological advances shift LRAC curves downward.
Over the very long run, the most important influence on costs of production and on standards of living
has been increases in output made possible by technological improvements.
Changes in technology are often endogenous responses to changing economic signals; that is, they
result from the firms’ responses to changes in the economic environment.
There are three important kinds of technological change: developments of new production techniques,
improved inputs, and new products. All three play an important role in increasing living standards.
To understand any industry’s response to changes in its operating environment, it is important to
consider the effects of endogenous innovations in technology as well as substitution based on changes in
the use of existing technologies.
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