chapter 8 Flashcards
(18 cards)
describe the LONG RUN TOTAL COST FUNCTION
the LR total cost function relates minimised total cost the output, Q and the relative factor prices (w,r)
TC(Q,w,r) = wL(Q,w,r) + rK(Q,w,r)
where L* and K* are the LR input demand functions
what is the LR TC curve
shows minimised total cost as output varies, holding input prices constant
how do you derive the LR TC curve from a production function ?
- rearrange the production function to find L and find K
- plug them into the TC function for L* and K*
- then simplify
how do changes in input prices effect
a. cost minimising input
b. slope of the isoquant
c. tc curve
a. stays the same
b. stays the same
c. shifts by the amount the price changes
describe the LR AVERAGE TC function
LRTC/ Quantity
describe the LR MARGINAL COST function
measures the rate of change of TC as output varies
MC(Q,w,r)
= TC(w,r,Q+chngeQ)/chngeQ - TC(Q,w,r)/chngeQ
= change TC(Q,w,r) / chngeQ
( differentiate )
LRMC = changeLRTC/changeQ
=Dlrtc/Dq
describe the relationship between AV and Marginal cost ?
when AC is rising MC is above it
when AC constant MC equals AC
when AC is falling MC is below it
what are economies and diseconomies of scale ?
economies of scale - if average cost decreases as output rises, all else equal, the cost function exhibits economies of scale
diseconomies - if average cost increases as output rises, all else equal, the cost function exhibits economies of scale
what is the MINIMUM EFFICIENCY SCALE and how do you calculate it ?
the smallest quantity at which the LR AC curve attains its minimum point
MES is Q where AC = MC
describe RETURNS TO SCALE
- where the production function exhibits increasing returns to scale the LR AC function exhibits economies of scale
- same for decreasing and diseconomies
- when the production function exhibits constant returns to scale the LR AC function is flat
describe the SR TC function
tells us the minimised total cost of producing Q when at least one input is fixed at a particular level
STC(Q) = wL + rK
describe the total variable cost function
the minimised sum of expenditures on variable inputs at the SR cost minimising input combinations
- all the elements of the TC function with Q
describe the total fixed cost function
its a constant equal to the total cost of the fixed inputs
- the constant of the TC function
how do you derive a SRTC curve ?
as one factor is fixed you use the Q function to find the other factor in terms of the fixed one
and plug this into the STC function
describe the relationship between the LR and SR TC functions ?
the firm can minimise costs at least as well in the LR as in the SR because its ‘less constrained’ therefore the STC curve lies everywhere above the LRTC
when the Q of the fixed inputs just equals the optimal LR Q of the inputs, the STC and LRTC coincide
eq when Q of K is fixed at Ko STC(Q) > TC(Q) except at point A where they coincide
describe the SR average cost function
the SR total cost function divided by output Q
SAC(Q,Ko) = STC(Q,Ko) / Q
where w and r are held
describe the SR MC function
SMC (Q,Ko) = changeSTC / changeQ
summarize some of the cost equations
STC = TVC + TFC
SAC = AVC + AFC = STC / Q
