Ch. 9: Long Run Production Costs
economies of scale
occurs when long-run average cost (LRATC) falls as output increases, tends to be larger firms, comes from division of labor and specialization
diseconomies of scale
occurs when long-run average cost (LRATC) rises as output increases, tends to be smaller firms and firms that offer custom products
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
economies
When LRATC is falling, _________ of scale exist
downsizing
eliminate workers with the lowest bang for buck; reduces output by less than "dumbsizing"
isoquant map
A graph showing a group of isoquants
minimum
LRMC intersects LRACT as its ___________
increase, decrease, downwards
If bang per buck of labor is higher than bang for buck of capital, the firm should _____ labor and ______ capital, moving ______ along the isoquant
decrease, increase, upwards
If bang per buck of labor is lower than bang for buck of capital, the firm should _____ labor and ______ capital, moving ______ along the isoquant
increasing returns to scale
If firm doubles both labor and capital, the firm will more than double its output
diminishing rate of technical substitution
MRTS diminished as firm moves down along the isoquant substituting L for K (convex shape)
diseconomies
When LRATC is rising, __________ of scale exist
falling
When LRMC < LRATC, then LRATC is __________
constant
When LRMC = LRATC, then LRATC is _____________
rising
When LRMC > LRATC, then LRATC is __________
isoquant
a curve showing all possible combinations of inputs physically capable of producing a given fixed level of output
dumbsizing
across the board cuts; based in fairness and equity
characteristics of isoquants
downward (negative sloping), higher isoquants indicate higher levels of output, diminishing MRTS, infinite number of isoquants
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, usually have common or shared inputs
multiproduct total cost function
gives the lowest total cost for a multiproduct firm to produce X units of one good and Y units of another good
optimal combination
input combination on isoquant for which quantity is tangent (equal slope) to an isocost curve
common or shared inputs
inputs that contribute to the production of two or more goods or services
isocost curve
line that shows the various combinations of inputs that may be purchased for a given level of expenditure at given input prices
bang for buck
marginal product per dollar spent
long-run average cost
measures the cost per unit of output when production can be adjusted so that the optimal amount of each input is employed
marginal rate of technical substitution (MRTS)
the absolute value of the slope of an isoquant (w/r); the rate at which one input is substituted for another along an isoquant while maintaining a constant level of outcome; diminished as a firm moves down along the isoquant substituting L from K
long-run marginal cost
the change in long-run total cost per unit change in output