Chapter 8 - Producers in the Long Run Flashcards
In the short run, at least one factor is _
Fixed
In the long run, all inputs are _
Variable
No fixed factors
What is technical efficiency?
When given number of inputs are combined to maximize level of output
Which option does the firm choose to maximize profit?
Lowest cost of labour and capital
What is cost minimization?
Maximizing profits by choosing a level of output at the lowest possible cost
What is the MP equation with K and L?
MPk/Pk = MPl/Pl MPk/MPl = Pk/Pl
When MPk/Pk=4 < MPl/Pl=10,
The last dollar spent on K adds _ units to output
The last dollar spent on L adds _ units to output
4, 10
Regarding the previous example, what should the firm do to reduce cost?
Use more L and less K
What is the principle of substitution?
Firms adjust the quantities of factors in response to changing relative factor prices
What is an example of the principle of substitution?
Using ATM instead of labour
The LRAC curve indicates the (max/min) achievable cost for each level of ouput
Minimum
What does the LRAC curve separate?
Unattainable and attainable cost levels
The LRAC is usually -shaped (or ‘ shape’)
U, saucer
There are no (variable/fixed) factors in LR
Fixed
When LRAC is falling, the firm is said to have _ _ _
Economies of scale
Where is economies of scale found on the curve?
Decreasing costs, increasing returns
What causes economies of scale?
Expansion in the scale of operations where more of all inputs are being used
Where is the minimum efficient scale found on the curve?
At the beginning of constant costs, constant returns
At the min of LRAC
Where is decreasing returns found on the curve?
Over the range of output greater than Qm
Decreasing returns imply that the firm suffers some _ _ _
Diseconomies of scale
Falling LRAC
Increasing returns to scale
Constant LRAC
Constant returns to scale
Rising LRAC
Decreasing returns to scale
Increasing returns to scale occur when
% d output > % d inputs
Decreasing returns to scale occur when
% d output < % d inputs
Constant returns to scale occur when
% d output = % d inputs
What is the difference between an LRAC and SRATC curve?
LRAC: all factors are variable
SRATC: one or more factors are fixed
Can an SRATC curve fall below the LRAC curve?
No
In the LR, firms are producing on the _ curve
LRAC
Tech improvement shifts the LRAC curve (up/down)
Down
A rise in factor prices shifts the LRAC curve (up/down)
Up
A fall in factor prices shift the LRAC curve (up/down)
Down
How do economists measure the extent of technological change?
Productivity
What are two widely used measures of productivity?
Output/work
Output/hr of work
Technological change is (exo/endo) to the economic system
Endogenous
What are the three aspects of technological change?
New techniques, improved inputs, new products
What is substituting away?
Changing production techniques within limits of existing technology
What is innovating away?
Developing new production techniques
Give an example of sub and inn away
Increase in price of coal
Sub: switch to other fuels
Inn: design tech that needs less fuel
