Chapter 6: in the Long Run

Transcription

1 Economics for Managers by Paul Farnham Chapter 6: Production and Cost Analysis in the Long Run 6.1

2 Long-run Production Function Relationship between a flow of inputs and the resulting flow of output where all inputs are variable: where Q = f (L, K) Q = quantity of output L = quantity of labor input (variable) K = quantity of capital input (variable) NOTE: both inputs are variable 6.2

3 Input Substitution Labor-intensive method: process that uses large amounts of labor relative to other inputs Capital-intensive intensive method: process that uses large amounts of capital equipment relative to other inputs 6.3

4 Input Substitution Input substitution: degree to which one input can be substituted for another Can occur in small-scale or large-scale business Some processes may not be conducive to substitution Issue is whether the same quality output is being produced with input substitution 6.4

5 Factors Influencing Input Substitution Technology Prices of inputs Incentives facing a given producer 6.5

6 Role of Competitive Environments X-inefficiency: i inefficiency i that may result in firms with market power having fewer incentives to minimize costs Best practices: production techniques adopted by firms with the highest levels of productivity Political and legislative influences affect production costs, sometimes with unforeseen consequences 6.6

7 Model of Long-run Average Cost Function LRAC shows minimum i average cost of producing any level of output when all inputs are variable Figure 6.1 SATC 1 SATC 2 SATC 3 SATC 4 LRAC 0 Q 1 Q 2 Q 3 Q 6.7

8 Economies of Scale Economies of scale: the average costs of production are lowered as the firm produces larger output levels with an increased scale of production Diseconomies of scale: higher unit costs of production results with larger scale of production 6.8

9 Factors Creating Economies of Scale Specialization and division of labor Technological factors Quantity discounts Spreading of advertising i costs Financial factors Combi- nation of inputs Pecuniary gains 6.9

10 Factors Creating Diseconomies i of Scale Inefficiencies of managing largescale operations Increased transportation costs resulting from concentrating production in a small number of large plants Important limitation to large-scale production is the management function 6.10

11 Other Factors Influencing LRAC Curve Learning by doing: reflects drop in unit costs as total cumulative production increases because workers become more efficient as they learn their tasks Other? 6.11

12 Transportation Costs in the Long-run LRAC Plus Transportation Costs Figure 6.3 LRAC 0 Q 1 Q 2 Average Transportation Costs Q 6.12

13 Minimum Efficient Scale MES: scale of operation at which the long-run average cost curve stops declining i or where economies of scale are exhausted Methods for determining i minimum efficient scale Surveys of expert opinion i Statistical cost estimation The survivor approach 6.13

14 MES with Different LRAC Curves Figure 6.4 D Market demand d curve A A C C D B B 0 MES A = MES B MES C MES D Q 6.14

15 Empirical Long-run Average Cost Curve Figure 6.5 LRAC 0 Q MES MES = minimum efficient scale Q 6.15

16 Summary of Key Terms Best practices Capital intensive production Diseconomies of scale Economies of scale Input substitution Labor-intensive production 6.16

17 Summary of Key Terms Learning by doing Long-run average cost Long-run production function Minimum efficient scale 6.17