PAM_2000_Spring_2009_Lecture_11

PAM_2000_Spring_2009_Lecture_11 - PAM 2000 Lecture 11...

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    PAM 2000 Lecture 11 Agenda Returns to scale Economic cost
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    Returns to Scale In the long-run: all inputs are variable Returns to Scale (RTS) shows how much output changes if we increase all inputs proportionately This helps the firm figure out its correct size or scale in the long-run
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    Returns to Scale (con’t) 3 different situations : 1. Constant returns to scale : Here output increases proportionately as all inputs increase 2. Increasing returns to scale : Here output increases more than proportionately as all inputs increase 3. Decreasing returns to scale : Here output increases less than proportionately as all inputs increase
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    Returns to Scale in Manufacturing
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    Application (b) Returns to Scale in Manufacturing
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    Application (c) Returns to Scale in Manufacturing
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    Returns to Scale (con’t) Keep in mind what these notions mean: Increasing RTS means that the firm gets more output per unit of input just by being bigger (greater scale) Decreasing RTS means that the firm gets less output per unit of input just by being bigger Reasons for increasing returns to scale?
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    Returns to Scale (con’t) Reasons for decreasing returns to scale? Firms may exhibit increasing returns to scale at low outputs and decreasing returns to scale at high outputs
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    Cost: Opportunity Cost Economic Costs : Are different from accounting costs due to opportunity cost Opportunity Cost: The highest-valued alternative given up to make a choice Opp. cost critical because it dries behavior Ex: Mailing a package. Say you are paid hourly; you leave work to mail a package You must wait in line for a half hour
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    Opportunity Cost What is the total cost of mailing the package? Cost of postage Opportunity cost of waiting Is probably more costly
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    Opportunity Cost (con’t) Opportunity cost of going to college. What are total college costs?: Tuition and fees, books Foregone wages Is graduate school be more or less costly in terms of opportunity costs than college?
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