Long run cost
Intros
Lessons
- Long-Run Production Function
- Both labour and capital vary
- Table for Production Function
- Diminishing returns of marginal product of labour
- Diminishing returns of marginal product of capital
- Short-Run Costs & Total Average Costs
- All ATC curves are U-shaped
- More machines = bigger output at minimum average cost
- Planned output → find the lowest possible cost
- Long-Run Average Cost
- LRAC: Long Run Average Cost
- Lowest attainable cost across all ATC curves
- What it looks like
- Economies & Diseconomies of Scale
- Economies of Scale: average cost as output , falling LRAC
- Diseconomies of Scale: average cost as output , rising LRAC
- Constant Returns to Scale: average cost unchanged as output , horizontal LRAC
- Minimum Efficient Scale
Examples
Lessons
- Finding the Average Total Costs
Suppose the cost of each machine is $50, and the cost of each worker per week is $50. Using the following table to calculate and graph the ATC curves for factories 1 and 2.Labour (workers per week)
Output (Clothes per week)
Factory 1
(1 machine)
Factory 2
(2 machines)
Factory 3
(3 machines)
Factory 4
(4 machines)
1
10
30
45
55
2
30
50
65
75
3
45
65
80
90
4
55
75
90
100
5
60
80
95
105
- Suppose the cost of each machine is $50, and the cost of each worker per week is $50. Using the following table to calculate and graph the
ATC curves for factories 3 and 4.
Labour (workers per week)
Output (Clothes per week)
Factory 1
(1 machine)
Factory 2
(2 machines)
Factory 3
(3 machines)
Factory 4
(4 machines)
1
10
30
45
55
2
30
50
65
75
3
45
65
80
90
4
55
75
90
100
5
60
80
95
105
- Understanding the Long-Run Cost Curve
Suppose you are given 4 ATC curves on the following graph.
- Suppose you are given 4 ATC curves on the following graph.
