Lecture14 - Lecture 14 Returns to scale versus economies of...

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Lecture 14 Returns to scale versus economies of scale, short-run and long-run costs, production with multiple outputs and economies of scope
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Returns to scale How does an increase in all inputs relate to an increase in output? q(aL, aK) = aq (L, K) → constant returns to scale q(aL, aK) > aq (L, K) → increasing returns to scale q(aL, aK) < aq (L, K) → decreasing returns to scale 10 20 10 20 q=100 q = 200 10 20 10 20 q = 100 q = 250 10 20 10 20 q = 100 q = 150
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Economies of Scale When the input mix is optimized to minimize cost, we can define a cost to be a function of output quantity C(q) C=100 C=200 Q=50 Q=10 C=100 C=200 Q=15 Q=10 Output Total Cost 200 100 10 20 50
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Returns to scale versus economies of scale Increasing returns to scale: output more than doubles when the quantities of all inputs are doubled. The issue is the production function q(L, K). Economies of scale: A doubling of output requires less than a doubling of cost. The issue is the cost function
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This note was uploaded on 01/17/2012 for the course ECON 100A taught by Professor Safarzadeh during the Fall '09 term at UC Irvine.

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Lecture14 - Lecture 14 Returns to scale versus economies of...

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