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