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ECO100Y5 (285)
Lee Bailey (39)
Chapter 8

Chapter 8 Producers in the Long Run.docx

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Lee Bailey

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 MP =Kp K MP =Lp L  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
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