ECON-1006EL Chapter Notes - Chapter 8: Profit Maximization, Longrun, Marginal Product
23 May 2018
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Chapter 8: Producers in the Long Run
Definitions
Technical
Efficiency
When a given number of inputs are combined in such a way as to maximize the
level of output
Cost Minimization
An implication of profit maximization that firms choose the production method
that produces any given level of output at the lowest possible cost
Principle of
Substitution
The principle that methods of production will change if relative prices of inputs
change, with relatively more of the cheaper input and relatively less of the more
expensive input being used
Long-run Average
Cost (LRAC) curve
The curve showing the lowest possible cost of producing each level of output
when all inputs can be varied
Economies of Scale
Reduction of long-run average costs resulting from an expansion in the scale of a
firm’s operations so that more of all inputs is being used
Increasing Returns
(to scale)
A situation in which output increases more than in proportion to its inputs as the
scale of a firm’s production increases. A firm in this situation is a decreasing-
cost firm
Minimum Efficient
Scale (MES)
The smallest output at which LRAC reaches its minimum. All available
economies of scale have been realized at this point
Constant Returns
(to scale)
A situation in which output increases in proportion to inputs as the scale of
production is increased
Decreasing Returns
(to scale)
A situation in which output increases less than in proportion to inputs as the
scale of a firm’s production increases. A firm in this situation is an increasing
firm
Technological
Change
Any change in the available techniques of production
Productivity
Output produced per unit of some input; frequently used to refer to labour
productivity, and measured by total output divided by the amount of labour used
Equations
Long-Run Cost Minimization
Key Points
• Whenever the ratio of marginal product of each factor to its price is not equal for all
factors, there are possibilities for factor substitutions that will reduce costs (for a given
level of output).
• Profit-maximizing firms adjust the quantities of factors they use to the prices of the
factors given by the market.
• Methods of production will change if the relative prices of factors change. Relatively
more of the cheaper factor and relatively less of the more expensive factor will be used.
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Document Summary
Cost minimization an implication of profit maximization that firms choose the production method. When a given number of inputs are combined in such a way as to maximize the level of output. Substitution that produces any given level of output at the lowest possible cost. The principle that methods of production will change if relative prices of inputs change, with relatively more of the cheaper input and relatively less of the more expensive input being used. The curve showing the lowest possible cost of producing each level of output when all inputs can be varied. Economies of scale reduction of long-run average costs resulting from an expansion in the scale of a firm"s operations so that more of all inputs is being used. A situation in which output increases more than in proportion to its inputs as the scale of a firm"s production increases. A firm in this situation is a decreasing- cost firm.
