Econ 211 lecture 13b LRAC

Econ 211 lecture 13b LRAC - The relation between Cost...

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The relation between Cost Curves and Product Curves. The technology a firm uses, in part, determines its costs. You can view a firm’s product curves as a technology constraint – that is, it shows the maximum possible production possibilities at all labor levels. Product curves and costs curves are intrinsically linked. See graph. Graph: As labor increases initially, marginal product and average product rise; marginal cost and average variable cost fall. When MP is maximized, then MC is minimized. Recall that MP = change in TP due to adding one more unit of labor. MC = change in TC/ change in Q (in our approximation world). So if adding each new worker adds $25 to TC, then the lowest marginal cost will occur when change in Q is the highest – that is, when MP is the highest. Then, as labor increases further, MP diminishes, and MC increases. AP continues to rise, however, and AVC falls. Finally, at the max of AP, AVC is minimized. After that point, AP and MP are falling, and MC and AVC are rising. Shifts in cost curves Shifts occur when technology changes or when the prices of productive resources changes. With better technology, the same inputs (capital and labor quantities) can produce more
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This note was uploaded on 04/09/2008 for the course ECON 211 taught by Professor Johnson during the Spring '07 term at Clemson.

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Econ 211 lecture 13b LRAC - The relation between Cost...

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