TAILIEUCHUNG - Lecture Basic microeconomics - Chapter 10: Production and cost analysis II

Lecture Basic microeconomics - Chapter 10: Production and cost analysis II. This chapter concludes with a look at the role of the entrepreneur in translating costs of production to supply, and some of the problems of using cost analysis in the real world. | Production and Cost Analysis II Chapter 10 Making Long-Run Production Decisions To make their long-run decisions, firms look at costs of various inputs and the various production technologies available for combining these inputs, and then decide which combination offers the lowest cost. Technical Efficiency and Economic Efficiency Technical efficiency means that the fewest possible inputs are used to produce a given output. Technical efficiency is efficiency that does not consider costs of production. Technical Efficiency and Economic Efficiency The economically efficient method of production is the method that produces a given level of output at the lowest possible cost. Determinants of the Shape of the Long-Run Cost Curve The law of diminishing marginal productivity does not hold in the long run since all inputs are variable. Determinants of the Shape of the Long-Run Cost Curve The shape of the long-run cost curve results from the existence of economies and diseconomies of scale. Economies of Scale There are economies of scale in production when the long run average cost decreases as output increases. Economies of scale (increasing returns to scale) are cost savings associated with larger scale of production. Economies of Scale An indivisible setup cost is 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. Economies of Scale Indivisible setup costs are the source of many real-world economies of scale. Economies of Scale Economies of scale occur whenever inputs do not need to be increased in proportion to the increase in output. As output increases, cost per unit falls in the long run, so this can also be seen as an increase in productivity. Economies of Scale Doubling the inputs more than doubles the output, when there are economies of scale. Firms can economize on management cost, or they can take advantage of specialized labour and specialized capital. A .

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