Chapter 13 Notes - [ChapterThirteen]...

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[Chapter Thirteen] Production and Cost Analysis II Learning Objectives After reading the material in this chapter, you will be able to do the following: 1. Distinguish technical efficiency from economic efficiency. 2. Explain how economies and diseconomies of scale influence the shape of long- run cost curves. 3. State the envelope relationship between short-run cost curves and long-run cost curves. 4. Explain the role of the entrepreneur in translating cost of production to supply. 5. Discuss some of the problems of using cost analysis in the real world. Chapter Outline Making Long-Run Production Decisions Firms have more options in the long run than in the short run because nothing is fixed. Example: when deciding to open a hamburger stand, one could buy many different kinds of stoves and hire many kinds of workers. Decisions are made on the basis of expected costs and usefulness of inputs. Technical Efficiency and Economic Efficiency Technical Efficiency: “As few inputs as possible are used to produce a given output.” Many production processes can be technically efficient. Economically Efficient (method of production): “The method that produces a given level of output at lowest possible cost.”
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Firms will choose the economically efficient way to produce; these choices reflect relative prices of various factors of production; these prices reflect factors’ relative scarcities. Example: U.S. has 8 acres per person; Japan has 0.73 acres per person. A rural acre of land in the U.S. might cost $1,300; in Japan it costs over $10,000. Production in Japan uses land more intensively. Example: Labor in China is more abundant, so production in China uses capital more intensively. In China, hundreds of workers and very little machinery would be used to build a road; in the U.S. three or four workers along with three machines might be used. Determinants of the Shape of the Long-Run Cost Curve The law of diminishing marginal productivity doesn’t apply in the long run because all inputs are variable, so the firm is not adding increasing amounts of one input to a fixed input. Economies of Scale Economies of Scale: “When long-run average total costs decrease as output increases.” Example: producing 40,000 DVD players costs a firm $16 million ($400 each), but producing 200,000 DVD players costs $40 million ($200 each). This can also be called “increasing returns to scale.” Many production techniques require a minimum level of output to be efficient. Example: you wouldn’t use a mini blast furnace to produce a pound of steel. The smallest technically efficient blast furnaces have an output measured in tons per hour. Indivisible Setup Cost: “The cost of an indivisible input for which a
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This note was uploaded on 12/03/2011 for the course ECON 101 taught by Professor Smith during the Fall '11 term at North Shore Community College.

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Chapter 13 Notes - [ChapterThirteen]...

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