Theory of the Firm II.pdf - LECTURE 9 THEORY OF THE FIRM(II...

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LECTURE 9 THEORY OF THE FIRM (II) 9 LECTURE
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Objectives After studying this chapter, you will able to Explain what happens to costs in the long run Derive and explain a firm’s long -run average cost curve Briefly explain the position for economies and diseconomies of scale on LRAC Explain minimum efficient scale
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A Recap The Long Run The long run is a time frame in which the quantities of all resources or factors (both fixed and variable) can be varied. Long-run decisions are not easily reversed. In the long run, all inputs are variable and all costs are variable.
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Long-Run Cost The Production Function The behavior of long-run cost depends upon the firm’s production function , which is the relationship between the maximum output attainable and the quantities of both capital and labour.
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Long-Run Cost Curves The marginal product of capital is the increase in output resulting from a one-unit increase in the amount of capital employed, holding constant the amount of labour employed. A firm’s production function exhibits diminishing marginal returns to labour (for a given plant size) as well as diminishing marginal returns to capital (for a quantity of labour).
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Long-Run Cost Curves For each plant size, diminishing marginal product of labour creates a set of short run cost curves for MC , AVC, and ATC .
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  • Fall '15
  • professor
  • Economics, Economics of production, Cost curve, long-run average cost

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