8.1 The Long Run: No Fixed Factors Flashcards
When does technical efficiency occur?
Technical efficiency occurs when a given number of inputs are combined in such a way as to maximize the level of output. Technical efficiency is not enough for profits to be maximized
What options do firms need to choose to maximize profit?
To maximize profit, the firm chooses among the many technically efficient options. The firm uses the technically efficient option that has the lowest cost. To maximize profit, the firm chooses the lowest cost combination of labour and capital. And the optimal amount to produce
What is cost minimization?
Cost minimization is an implication of profit maximization that firms choose the production method that produces any given level of output at the lowest possible cost. MPk/Pk = MPl/Pl
define the principle of substitution
The principle of substitution is the principle that methods of production will change if relative prices of inputs change, with relatively more of the cheaper input and relatively less of the more expensive input being used.
What is the long-run average cost (LRAC) curve?
The long-run average cost (LRAC) curve is the curve showing the lowest possible cost of producing each level of output when all inputs can be varied. Since all costs are variable in the long run, we do not
need to distinguish between AVC, AFC, and ATC. there is only one LRAC for any given set of input prices.
define Economies of scale
Economies of scale is a reduction of long-run average costs resulting from an expansion in the scale of a firm’s operations so that more of all inputs is being used. Enjoying increasing returns.
what is the name of the lowest point on a LRAC curve?
Minimum efficient scale (Qm). At Qm the firm experiences constant returns (the output increases in proportion to inputs as production is increased). If production cost rises by 5%, output rise by 5%.
define diseconomies of scale
when a firm suffers some decreasing returns. it is a situation in which output
increases less than in proportion to inputs as production increases.
What is the short-run average total cost (SRATC) curve?
SRATC curve shows the lowest cost of producing any output when one or
more factors are fixed. No short-run cost curve can fall below the long-run
cost curve because the LRAC curve represents the lowest attainable cost for each possible output.
what is the Relationship Between the
LRAC Curve and the SRATC Curves?
Each SRATC curve is tangent to the LRAC curve at the level of output for which the quantity of the fixed factor is optimal and lies above it for all other levels of output.
