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lecture_11_section_001__for_students_

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Unformatted text preview: Click to edit Master subtitle style 1/1/11 Lectur e 11 Costs (continued) Competitive fir ms and 1/1/11 Please be careful, I changed the slides that were left from lecture 10 here. Consider new slides. 1/1/11 • Where: o Students with family names A to L: PAS2083 o Students with family names M to S: PAS1241 o Students with family names Midterm 2 on Tuesday November 2, 1/1/11 Economies and diseconomies of scale • LAC shows economies of scale if LAC falls as q rises • LAC shows diseconomies of scale if LAC rises as q rises. (Example: in LAC=LTC/q , doubling q more than doubles LTC=>LAC↑) 1/1/11 Minimum efficient scale (MES) • MES is the smallest quantity (q) at which the LAC attains its minimum point. • The larger MES is, in comparison to overall market sales or output, the greater is the magnitude of economies of scale . • Usually, firms use the economies of scale for justifying their merger in courts when they are blamed for being anti-competitive. • This table shows MES for selected groups of firms. • Red firms have 1/1/11 • Economies of scale and returns to scale are closely related. • The return to scale of the production function determines how LAC varies with output level. Example: q=L2 and this function is IRS . LTC=wL= wq(1/2)=>LAC=LTC/q=w q(1/2)/q=w/q(1/2) As q ↑=>LAC↓=> The difference of returns to scale and economies of scale 1/1/11 Question The total cost of producing one unit is \$50. The total cost of producing two units is \$75. At a production level of two units, the cost function exhibits: a) economies of scale b) rising average costs c) increasing marginal costs 1/1/11 Relationships between LAC and SAC (or • LAC forms a boundary (or envelope) around the...
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