Chapter 8: Producers in the Long Run Flashcards
Technical efficieny
When a given number of inputs are combined in such a way as to maximise the level of output
Cost minimisation
An implication of profit maximisation that firms choose the production method that produces any given level of output at the lowest possible cost
Principle of substitution
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
Long-run average cost (LRAC) curve
The curve showing the lowest possible cost of producing each level of output when all inputs can be varied
Economies of scale
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
Increasing returns (to scale)
A situation in which output increases more than in proportion to inputs as the scale of a firm’s production increases. A firm in this situation is a decreasing-cost firm
Minimum efficient scale (MES)
The smaller output at which LRAC reaches its minimum. All available economies of scale have been realised at this point
Constant returns (to scale)
A situation in which output increases in proportion to inputs as the scale of production is increased. a firm in this situation is a constant-cost firm
Decreasing returns (to scale)
A situation in which output increases less than in proportion to inputs as the scale of a firm’s production increases. A firm in this situation is an increasing-cost firm
Technological change
Any change in the available techniques of production
Productivity
Output produced per unit of some input
Usually refers to labour productivity, measured by total output divided by amount of labour used
