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Unformatted text preview: Cite as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT OpenCourseWare (http://ocw.mit.edu), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY]. 1 1 Relation Between Long Run Cost Short Short Run Cost 14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen October 17, 2007 Lecture 14 The Cost of Production and Profit Maximization Outline 1. Chap 7: Relation Between Long Run Cost and Short Run Cost 2. Chap 7: Economies of Scale 3. Chap 7: Economies of Scope, Learning 1 Relation Between Long Run Cost Short Short Run Cost Since firms can change capital in the long run, the long run cost is always no more than the short run cost: C L R ( q ) C SR,K ( q ) . Figure 1 shows three short-run total cost given different capital level. In the long run, firms will choose the capital level which minimizes the total cost. Thus, the long-run total cost is equal to the minimum of all possible short-run total cost, and so long run total cost is the envelope of all short run total costs. Likewise, long-run average cost is the envelope of all short run average cost. From Figure 1, we know for a given product q , long run marginal cost is equal to the corresponding short run marginal cost. Long run total cost and marginal to the corresponding short run marginal cost....
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This note was uploaded on 04/26/2009 for the course ECON MICRO taught by Professor Chen during the Spring '09 term at MIT.
- Spring '09