ECO100Y5 Chapter 8: Chapter 8 Producers in the Long Run.docx

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3 Feb 2013
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ECO100Y5 Full Course Notes
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3. 1 chapter 8 producers in the long run (pg. 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 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.

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