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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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This note was uploaded on 01/01/2011 for the course ECON 101 taught by Professor E during the Spring '10 term at American College of Computer & Information Sciences.

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