chapter 10 econ

chapter 10 econ - Production and cost analysis Making...

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Unformatted text preview: Production and cost analysis Making long-run production decisions-look at costs of inputs and technologies available for combining those inputs, which combination offers the lowest cost. -decisions are made on basis of: expected costs, and expected usefulness of inputs. Technical Efficiency and Economic Efficiency-all consider technically efficient methods and compare costs-Technical efficiency : few inputs as possible used to produce output *Can't say what is more efficient unless you know the relative costs of the two inputs -Economically efficient : method that produces a given level of output at the lowest cost. *in long-run production decisions, firms look at all avaliable technologies, choose technology that is the economically efficient way to produce.-choices reflect prices, and in turn the prices will reflect the factor's relative scarcities. -If a process is economically efficient it is also technically efficient *since an economically efficient way of production is the method that produces an output at the lowest cost, it also must use as few inputs as possible. It is also technically efficient. *economically efficient is the technically efficient method that has the lowest cost. Determinants of the Shape of the Long-run cost curve-law of diminishing marginal productivity accounts for shape of the short-run average cost curve.-law of diminishing marginal productivity doesn't apply to the long-run, since input are all variable.-ECONOMICALLY EFFICIENT IN LONG-RUN: economies and diseconomies of scale Economies of Scale : when long run average total costs decrease as output increases. -important at low-level of production because many production techniques need a certain minimum level of output to be useful.-Indivisible setup cost : cost of an indivisible input for which a certain minimum amount of production must be undertaken before input becomes economically feasible to use. *create many real-world economies of scale-as output increases, cost per unit of output decreases *larger production runs are often cheaper than smaller runs due to indivisible setup costs which don't vary with the size of the run. -In the longer run, all inputs are variable, so only economies of scale can influence the shape of the long-run cost curve. -Minimum efficient level of production...
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chapter 10 econ - Production and cost analysis Making...

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