Production and Cost in the Long-Run 7.4-1 Flashcards Preview

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Flashcards in Production and Cost in the Long-Run 7.4-1 Deck (12)
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In the long run:

All inputs are variable, there are no fixed costs, and the firm can change the scale of its operation.


How does the long run differ from the short run?

How the costs are determined. In the short run, tools are fixed. In the long run, the scale can be decided independently of the ratio of workers to tools.


There are 2 decision that a firm can face in the long run. What are they?

1) The choice of Technique.
2) The choice of Scale.


The choice of Technique:

Labor intensive (more workers, less tools) or Capital intensive (more tools, less workers).


What is Technique?

The way in which the firm combines its inputs.


What is Scale?

The size of the operation.


The choice of Scale:

Small operation (uses few workers and few tools to produce output) or Large operation (uses many workers and many tools to produce output).


Does the size (scale) of the operation influence the cost of production?

Yes. The bigger your operation gets, the higher the costs could get or the lower the costs could get. It affects profit.


When will a firm maximize its profits by producing at the level of output where marginal cost equals price and marginal cost is increasing?

Always. In both the long run and short run.


In the short run:

Scale is fixed. You can only change labor.


The long run and the short run:

Do not refer to a specific amount of time, you just look at what you can accomplish in that period of time to figure out if it is LR or SR.


What is an Isocost Line?

It is a line that represents all combinations of a firm's factors of production that have the same total cost.