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18Lecture

# 18Lecture - LECTURE 18 Today is Tuesday The price of gold...

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LECTURE 18 Today is Tuesday, October 26, 2010. The price of gold is \$1,335 per ounce. LONG-RUN AVERAGE COST 1 In the short run, at least one factor is fixed. In the long run, all factors are variable. The short run ATC curve is always U-shaped. There are few restrictions on the shape of the LRAC (long run average cost) curve. Diminishing returns applies only to firms operating in the short run, and result from the fact that at least one factor is fixed. Diminishing returns does not apply to long run production functions. However, returns can vary, for firms in the long run, as the firm alters the scale of its operations. Sonny Hatley has planted 400 acres in cotton this growing season. That is his fixed factor. He can increase or decrease the number of bales he produces this growing season by altering the variable factors that he uses between now and harvest time. Diminishing returns will apply, if he tries to increase output by using more labor and capital, in response to higher cotton prices. If next year, he plants 800, or 1,600 or 5,000 acres in cotton, he will have altered the scale of his cotton producing firm. If his LRAC falls as he increases the scale of his operation, Sonny experiences increasing returns to scale . His long run cost curve falls as output increases, just as occurs initially with his short run ATC curve. For many firms, the LRAC curve is horizontal as the firm increases the scale of its operation. If a tire company opens more and more tire plants, in different cities, each plant with its own tire-making machinery and workers, there is no reason why 10 plants couldn't make tires at the same cost per tire as a single plant. As long as the LRAC curve of a firm is downward sloping, the firm is experiencing increasing returns to scale. If the LRAC curve of a firm is horizontal, the firm is experiencing constant returns to scale. If the LRAC curve increases as output increases, the firm is experiencing decreasing returns to scale. THE FIRM IN COMPETITION 1 We did not lecture on this in class, but we need to introduce the concept of long-run average cost. The thing to remember is that, in the long run, there are no fixed inputs, and it is the existence of fixed inputs in the short run that gives rise to the law of diminishing returns, which is a result of having at least one fixed input. In the long run, the average total cost curve can be upward sloping, or horizontal, or even downward sloping, over the relevant range of output of the firm.

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TO FULLY UNDERSTAND THIS LECTURE, AND THE GOLD MINING MODELS THAT WE ARE DEVELOPING, IT IS IMPORTANT FOR YOU TO HAVE ALL THE TABLES AND FIGURES IN FRONT OF YOU THAT RELATE TO SAID MODELS, BOTH IN CLASS AND WHEN YOU ARE STUDYING OUTSIDE OF CLASS. Assume our mining operation is only one of 1,000. We are a single firm in a competitive industry. We are a price taker . When we rise each morning, before we go to the mine, we turn on the business channel and see what the price of gold is. As it has (really) gone from \$600 per ounce to \$700 per ounce to, now, \$1,300 per ounce, we are really happy.
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18Lecture - LECTURE 18 Today is Tuesday The price of gold...

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