Intro - Chptr 10/Production & Costs: Long Run

Question 1

In production, what does technical efficiency mean?

Answer 1

As few inputs as possible are used to produce a given output.

Question 2

In production, what does economically efficient mean?

Answer 2

Producing a given level of output at the lowest possible cost. The economically efficient method of production is the technically efficient method that has the lowest cost.

Question 3

What is the impact of diminishing marginal productivity on the long run?

Answer 3

Diminishing marginal productivity doesn’t apply to the long run since all inputs are variable.

Question 4

What causes the shape of the long run cost curve?

Answer 4

Economies and diseconomies of scale.

Question 5

What is the minimum efficient level of production?

Answer 5

Amount of production that spreads setup costs out sufficiently for a firm to undertake production profitably.

Question 6

What is the “indivisible setup cost”?

Answer 6

The cost of an indivisible input for which a certain minimum amount of production must be undertaken before the input becomes economically feasible to use. Indivisible setup costs are important because they create real world economies of scale- as output increases, cost per unit decreases.

Question 7

What are economies of scale aka “increasing returns to scale” (IRS)?

Answer 7

When long-run ATC decreases as output increases, e.g. when double input, output more than doubles. Results from greater specialization of labor and management.

Question 8

What are “diseconomies of scale” aka “decreasing returns to scale” (DRS)?

Answer 8

When long-run ATC increases as output increases. If double input, output decreases.

Question 9

Why do diseconomies of scale occur?

Answer 9

Because production relationships have social dimensions. As firms get bigger, monitoring costs increase and team spirit/employee morale is more difficult. If production relationships were only technical relationships, DRS would not occur.

Question 10

What are monitoring costs?

Answer 10

Costs incurred by the organizer of production in overseeing employees. The bigger the firm, the more managers and the more checks and balances.

Question 11

What are “constant returns to scale” (CRS)?

Answer 11

When long-run ATC does not change with in increase in output; output increases by same proportion of input.

Question 12

What is the “envelope relationship”?

Answer 12

The relationship explaining that, at the planned output level, short-run ATC (SRATC) equals long-run ATC (LRATC), but at all other levels of output, short-run ATC is higher than long-run ATC.
IMAGE: 10-2.

Question 13

Why does the envelope relationship exist?

Answer 13

(1) Constraints always raise costs (or at least won’t lower them), so in the long-run, costs must be the same or lower than short-run costs.
(2) With IRS, if you have chosen a plant size that is efficient given your output, your short-run ATC will fall as you increase production.

Question 14

For large markets, what is the least-cost production of a firm?

Answer 14

The minimum point of the LRATC curve; it is only at this point that the SRATC curve is tangent to the LRATC at a point where SRMC curve intersects both the curves. At IRS, the SRMC are lower than SRATC at the point where SRATC is tangent to LRATC (SRMC intersects SRATC to the right of where SRATC is tangent to LRATC).

Question 15

Define entrepeneur.

Answer 15

Individual who sees opportunity to ell an item at a price higher than the average cost of producing it (including OC).

Question 16

What are “economies of scope”?

Answer 16

When costs of producing products are interdependent so that it’s less costly for a firm to produce one good when it’s already producing another.

Question 17

In addition to the standard model, what concepts are important in understanding costs in the real world? (re: production techniques)

Answer 17

Production techniques available to firms are constantly changing because of “learning by doing” and “technological change.” These are not part of the standard economic model because they change over time and cannot be accurately predicted.

Question 18

What is “learning by doing”?

Answer 18

As we do something, we learn what works and what doesn’t and over time we become more proficient at it. This concept emphasizes the importance of the past in trying to predict performance.

Question 19

Define “technological change”?

Answer 19

An increase in the range of production techniques that leads to more efficient ways of producing goods as well as the production of new and better goods. The standard long-run model takes technology as a given. Technological change occurs in all industries- not just high-tech industries.

Question 20

What is an effect of technological change on production?

Answer 20

In some industries, tech. change occurs so fast that it overwhelms all other cost issues, and, instead of costs increasing as output rises significantly, as might be predicted in DRS, costs keep going down. Firms might bid low for a big order to give themselves a chance to lower costs through tech. change and/or learning by doing.

Question 21

What is depreciation?

Answer 21

Measure of the decline in value of an asset that occurs over time.
The standard economic model doesn’t address depreciation; it assumes all costs are measurable in a single time period.

Question 22

How does “accounting” depreciation differ from “economic” depreciation?

Answer 22

An accountant will use historical cost (what the machine cost in terms of money actually spent) and apply a standard depreciation rate. Economic depreciation (1) takes into account “appreciation” due to scarcity, i.e. machine’s value increases due to scarcity and (2) doesn’t assume all assets will depreciate over time at a standard rate.