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C = f(Q)CC
• C = f(Q)
Expansion path
•It implies to Long run because:
No input is fixed.
Path starts from origin
indicating that if output is
zero costs are zero.
•Expansion path gives us the
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LONG RUN COST CURVE
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LONG RUN TOTAL PRODUCTION
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Inverse S shaped Curve
LONG RUN TOTAL PRODUCTION
•INCREASING RETURNS TO SCALE:
§ Given factors increase in a given proportion,
output increases in a greater proportion.
§ Many economies set in and increase in return is
more than increase in factors.
•
CONSTANT RETURNS TO SCALE:
§ Output increases in exactly same proportion with
the proportionate increase in factors.
§ Economies of scale are counter balanced by
diseconomies of scale.
•
DECREASING RETURNS TO SCALE:
§ Output increases in a smaller proportion.
§ Diseconomies outweigh economies of scale.
§
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Long run total cost curve
•In relation to long run production function long run cost
change in a reciprocal fashion.
•
The curve is divided in three phases according to LRTP:
•IRTS: with increase in output,
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production reaches level of
• normal capacity.
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DRTS: after level of normal
• Capacity costs begin to rise
• at an increasing
•
rate.
Possible causes for economies
Specialization in the use of labor and capital.
Indivisible nature of many types of capital
equipment.
Management efficiencies of line and staff.
Economies in maintaining inventory of
replacement parts and maintenance
personnel.
Discounts from bulk purchases.
Lower costs of raising capital funds
Possible causes for diseconomies
Disproportionate rise in transportation costs.
Input market imperfections e.g. wage rates
driven up.
Management coordination and control
problems.
Disproportionate rise in staff and indirect
labor.
Long run average cost
•
LRAC refers to minimum possible per unit cost
of producing different quantities of output of
a good in the long period.
•
Long run average cost curve
•Properties:
U-shaped curve.
•
Based on assumption of unchanging technology.
LRAC is flatter curve than the SRAC.
•
In economics ,we define long period
•
as that during which size & organization of the
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can be altered to meet changed conditions.
•Normally;
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sharply. Hence a flatter curve.
•
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Relationship between lrac and srac
It explains the derivation of ENVELOPE CURVE.
Envelope curve
•Since LRAC envelopes all short run curves, hence
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Called ENVELOPE CURVE.
LRAC can never cut SRAC but it will be tangential
to each SRAC at some point.
Average cost can not be higher in the long run
than in the short run;
•Explanation;