Chapter 9: Production and Cost in the Long Run Flashcards
(19 cards)
isoquant
A curve showing all possible combinations of inputs physically capable of producing a given fixed level of output.
isoquant map
A graph showing a group of isoquants; all isoquants lying above and to the right of a given isoquant indicates higher level of output
marginal rate of technical substitution (MRTS)
The rate at which one input is substituted for another along an isoquant
isocost curve
Line that shows the various combinations of inputs that may be purchased for a given level of expenditure at given input prices; useful tool for analyzing the cost of purchasing inputs
expansion path
The curve or locus of points that shows the cost-minimizing input combination for each level of output with the input/price ratio held constant.
long-run average cost (LAC)
Long-run total cost divided by output (LAC = LTC/Q).
long-run marginal cost (LMC)
The change in long-run total cost per unit change in output (LMC = ΔLTC/ΔQ).
economies of scale
Occurs when long-run average cost (LAC) falls as output increases.
diseconomies of scale
Occurs when long-run average cost (LAC) rises as output increases.
specialization and division of labor
Dividing production into separate tasks allows workers to specialize and become more productive, which lowers unit costs.
constant costs
Neither economies nor diseconomies of scale occur, thus LAC is flat and equal to LMC at all output levels.
minimum efficient scale (MES)
Lowest level of output needed to reach minimum long-run average cost.
economies of scope
Exist when the joint cost of producing two or more goods is less than the sum of the separate costs of producing the goods.
multiproduct total cost function: LTC (X,Y)
Gives the lowest total cost for a multiproduct firm to produce X units of one good and Y units of another good.
joint products
When production of good X causes one or more other goods to be produced as by products at little or no additional cost.
common or shared inputs
Inputs that contribute to the production of two or more goods or services
purchasing economies of scale
Large buyers of inputs receive lower input prices through quantity discounts, causing LAC to shift downward at the point of discount.
learning or experience economies
When cumulative output increases, causing workers to become more productive as they learn by doing and LAC shifts downward as a result.
short-run expansion path
Horizontal line showing the cost-minimizing input combinations for various output levels when capital is fixed in the short run.
