Chapter 13 - -the shape if the LRAC is due to economies of...

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10.22.2007 Chapter 13 Costs in the SR -every additional worker you hire is contributing less, but is costing you the same, so the AC goes up -the marginal cost and average variable cost shapes are due to the law of diminishing marginal returns -average cost curve is the sum of average fixed cost(constantly declining) + average variable cost(u-shape) -AC=AFC+AVC -net result: u-shape -as output increases, the afc gets closer and closer to zero, therefore, ac and avc get closer and closer to each other…the only time they intersect is if afc=0 Costs in the LR -no average fixed cost curve…no avc curve -no fixed inputs or variable inputs -you cannot use the law of diminishing marginal returns to explain the shape of the long run curve because there are no fixed inputs
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Unformatted text preview: -the shape if the LRAC is due to economies of scale-economies of scale-costs decline as output increases-diseconomies of scale-costs increase as output increases e.g.-coordination problems-the lowest point of the ac curve is the minimum efficient scale *short run shapes are explained using the law of diminishing marginal returns, the long run shape is explained by economies of scale! How do we obtain the LRAC? q=KL k1=4, k2=8, k3=12 so, q1=4L q2=8L q3=12L each production function gives you one set of cost curves.-in the long run, you have a lot more flexibility and choices, therefore you should be able to have lower costs.-long run ac curve is below the srac curve…it forms the outer envelope(lower limit) of the sracs...
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