Econ 201 Chpt 12

The point of least-cost production is when

a firm is at the minimum point on the LRATC is the SRATC curve curve tangent to the LRATC curve at a point where the SRMC curve intersects both curves.

Depreciation

a measure of the decline in value of an asset that occurs over time

social entrepreneurship

the pursuit of social goals while creating a profitable business

marginal rate of substitution

the rate at which a consumer would be willing to trade off one good for another

When do constant returns to scale occur?

when a firm is able to replicate its existing production facility including its management system (before monitoring costs rise and team spirit is lost)

economies of scale

when long-run average total cost declines as output increases

diseconomies of scale

when long-run average total cost increases as output increases (diminishing marginal productivity is NOT the cause)

constant returns to scale

when long-run average total cost is does not change as output increases

economies of scope

when the 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. (key part of globalization)

The Shape of the Long Run Cost Curve

-the law of diminishing marginal productivity does not apply in the long run -all inputs are variable in the long run -the shape of the long-run cost curve is due to the existence of economies and diseconomies of scale

Isoquant Curve

A curve that shows all the technologically efficient combinations of two resources, such as labor and capital, that produce a certain rate of output.

diseconomies of scale could not occur if production relationships were only technical relationships; two potentials for DEoS

1. As the size of the firm increases, monitoring costs generally increase. 2. As the size of the firm increases, team spirit or morale generally decreases.

why is LR costs always be less than or equal to SR costs?

Because in SR you still have fixed costs but in LR you can change everything. additional constraints raise costs

Importance of economies of scale

EoS=why firms decide to expand their markets, DEos=prevent a firm from expanding and can lead corporate raiders to buy a firm and break it up in the hope that the smaller production units will be more efficient, thus eliminating some of the DEoS

Entrepreneur

a person who organizes and operates a business or businesses, taking on greater than normal financial risks in order to do so; they see an opportunity to sell an item at a price higher than the average cost of producing it.

technical efficiency

a production process uses as few inputs as possible to produce a given level of output

technological change

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 (can fundamentally alter the nature of production costs)

learning by doing

as we do something, we learn what works and what doesn't, and over time we become more proficient at it

envelope relationship

between long-run and short-run average total costs. At the planned output level, SR ATC=LR ATC but at all other levels of output, SR ATC is higher than LR ATC. So LR costs will always be less than or equal to SR costs.

isoquant map

graph combining a number of isoquants, used to describe a production function

the ___________ the difference between price and ATC, the __________the entrepreneur's incentive to tackle the organizational problems and supply the good

greater

isocost line

identifies all combinations of capital and labor the firm can hire for a given total cost

shape of average cost curve in short run is due to the assumption that

initially increasing and then decreasing marginal productivity accounts

all economically efficient processes are technically efficient, but

not all technically efficient processes are economically efficient

minimum efficient level of production

the amount of production that spreads setup costs out sufficiently for a firm to undertake production profitably; at this point the market has expanded to a size large enough for firms to take advantage of economies of scale; minimum efficient levels are where ATCs are at a minimum

indivisible set up cost

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

Monitoring costs

the costs incurred by the organizer of production in seeing to it that the employees do what they're supposed to do (major contributor to DEoS)

For a good to be supplied,

the expected price must exceed the ATC of supplying the good

team spirit

the feelings of friendship and being part of a team that bring out people's best efforts; loss of this contributes to DEoS

economically efficient

the method that produces a given level of output at the lowest possible cost

When there are economies of scale and you have chosen an efficient plant size for a given output,.....

your short run average costs will fall as you increase production. SRMC goes through min point of SRATC and the minimum SRATC is to the right of efficient levels of production in the LR. At the output 2, SRMC2 has to be below SRATC2 and the short run ATC has to be falling.