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Diminishing Returns Set in Here TPP Maximum Output: Lecture 7 Notes Cost Curves

This document provides lecture notes on cost curves. It discusses concepts like diminishing returns, total, average, and marginal costs. It also covers the Cobb-Douglas production function example and how in the long run all factors are variable and there are no fixed costs. The long-run average cost curve is a planning curve that can shift due to economies of scale, diminishing returns turning to returns to scale, and diseconomies of scale or agglomeration economies kicking in past the minimum point. It also discusses the concept of minimum efficient scale and economies of scope from producing multiple products.

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31 views2 pages

Diminishing Returns Set in Here TPP Maximum Output: Lecture 7 Notes Cost Curves

This document provides lecture notes on cost curves. It discusses concepts like diminishing returns, total, average, and marginal costs. It also covers the Cobb-Douglas production function example and how in the long run all factors are variable and there are no fixed costs. The long-run average cost curve is a planning curve that can shift due to economies of scale, diminishing returns turning to returns to scale, and diseconomies of scale or agglomeration economies kicking in past the minimum point. It also discusses the concept of minimum efficient scale and economies of scope from producing multiple products.

Uploaded by

120219a
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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LECTURE 7 NOTES

COST CURVES

Diminishing returns set in here


TPP

Maximum output

v
Diminishing
returns
Where APP is highest
APP

Maximum output

efficient production

MPP

COSTS DEPEND ON:


-

Quantity of factors of production


Efficiency in which theyre used
Price

TC = TFC +TVC
AFC = TFC/Q
AVC= TVC/Q
MC = dTC/dQ

COBB DOUGLAS FUNCTION EXAMPLE

Q= 2K L

= 0.5

IF K = 25
Q= 10L
MPL = 5L-

IN THE LONG RUN.


-

e.o.s

All factors are variable


No fixed costs
The long run cost curve is a planning curve

d.o.s

WHY DOES THE LRAC SHIFT?


-

Business achieve economies of scale


Diminishing returns to scale in short run turns to returns to scale in
long run
After minimum point on the LRAC you get diseconomies of scale
Agglomeration economies

MINIMUM EFFICIENT SCALE (MES)


-

If you produce at half the MES, you incur higher costs

IF WE HAVE MULTIPLE PRODUCTS .


-

We have economies of scope


We get benefits from inventory savings

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