Inputs, Production & Costs in the Long Run
What is Short Run?
A period in which at least one factor of production (input) is fixed. Usually, labour is variable & capital is fixed.
What is Long Run?
A period in which no factors of production are fixed, they’re all variable.
Efficient Combinations of Labour & Capital
What is Marginal Analysis?
The process of comparing the change in benefits with the change in costs resulting from an action.
Diminishing Marginal Product
As a firm increases the amount of one factor and reduces the other factor (or holds it constant), the returns from the factor that is being increased will eventually begin to diminish.
When Will Cost Be Minimized in the Long Run?
When this is true. If it’s not, you use whatever one is greater until it is equal.
Output & Costs in the Long Run
Long Run Average Cost with Constant Returns to Scale
Long Run Average Cost with Economies of Scale
Economies of Scale are when long run average total cost decreases as output increases. They are caused by:
- Specialization of all Inputs
- Dimensional Factors: Water pipe with twice the diameter may cost 2x, yet it can deliver 4x as much water.
- Larger Volume Equipment: Capital is not easily divisible among small firms. This equipment is less costly per good produced the more goods they produce (like assembly lines or printing presses).
Long Run Average Cost with Diseconomies of Scale
Diseconomies of Scale are when long run average total cost increases as output increases. They occur because big firms have costs that small firms don’t (like the need to hire an HR department).
Economies of Scale, Constant Returns to Scale & Diseconomies of Scale
This long-run average cost curve occurs when all inputs are expanded!
Shifts in Cost Curves
If total cost increases, total cost divided by total product increases. Thus, average cost increases.
If total product increases, total cost divided by total product decreases. Thus average cost decreases.