MGEA02H3 Chapter Notes - Chapter 8: Marginal Product
DepartmentEconomics for Management Studies
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Chapter 8: Producers in the Long Run
8.1 – THE LONG RUN: NO FIXED FACTORS
Technical efficiency is when a given number of inputs are combined to maximize the
level of output.
Profit Maximization and Cost Minimization
Cost minimization is an implication of profit maximization that firms choose the
production method that produces any given level of output at the lowest possible cost.
Long-Run Cost Maximization
The necessary condition for cost minimization: (MPK / PK) = (MPL / PL)
Whenever the ratio of the marginal product of each factor to its price is not equal for all
factors, there are possibilities for factor substitutions that will reduce costs.
The law of diminishing returns says that, with other inputs held constant, an increase in
the amount of one factor used will decrease that factor’s marginal product.
Profit-maximizing firms adjust the quantities of factors they use to the prices of the
factors given by the market.
The Principle of Substitution
This is the principle that methods of production will change if relative prices of inputs
change, with relatively more of the cheaper input and relatively less of the more
expensive input being used.
Methods of production will change if the relative prices of factors change. Relatively
more of the cheaper factor and relatively less of the more expensive factor will be used.
Long-Run Cost Curves
When the minimum cost of producing each level of output is plotted on a graph, the
result is called long-run average cost (LRAC) curve.
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