Long Run Productivity and Cost Rules

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Technical Efficiency

answer

When a given number of inputs are combined in such a way as to maximize the level of output

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Long Run Decisions

answer

Labor and cost

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Cost Minimization

answer

Firms choose the production method that produces any given level of output at the lowest possible cost

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Principle of Substitution

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Methods of production will change if relative prices of inputs change, with relatively more of the cheaper input and relatively less of the more expensive input being used

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Long Run Average Cost Curve: Decreasing Costs

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Economies of scale and results in increasing returns

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Economies of Scale

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Reduction of long-run average costs resulting from an expansion in the scale of a firm's operations so that more of all inputs is being used

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Increasing Returns

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Output increases more than in proportion to inputs as the scale of a firm's production increases

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Long Run Average Cost Curve: Constant Costs

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Minimum Efficient Scale and Constant Returns to Scale

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Minimum Efficient Scale

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The smallest output at which LRAC reaches its minimum.

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Long Run Average Cost Curve: Increasing Costs

answer

Diseconomies of scale and results in decreasing returns to scale

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Constant Returns to Scale

answer

Firm's output must be increasing exactly in proportion to the increase in inputs

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Decreasing Returns to Scale

answer

Output increases less than in proportion to inputs as the scale of a firm's production increases. Increasing cost firm

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Long Run Average Cost Cure

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At every point on the LRAC curve, there is an associated Short-Run Average Total Cost (SRATC) curve tangent at that point

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Rise in Price Factors

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Shifts LRAC upward

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Fall in Price Factors

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Shifts LRAC downward

1 of 15

question

Technical Efficiency

answer

When a given number of inputs are combined in such a way as to maximize the level of output

question

Long Run Decisions

answer

Labor and cost

question

Cost Minimization

answer

Firms choose the production method that produces any given level of output at the lowest possible cost

question

Principle of Substitution

answer

Methods of production will change if relative prices of inputs change, with relatively more of the cheaper input and relatively less of the more expensive input being used

question

Long Run Average Cost Curve: Decreasing Costs

answer

Economies of scale and results in increasing returns

question

Economies of Scale

answer

Reduction of long-run average costs resulting from an expansion in the scale of a firm's operations so that more of all inputs is being used

question

Increasing Returns

answer

Output increases more than in proportion to inputs as the scale of a firm's production increases

question

Long Run Average Cost Curve: Constant Costs

answer

Minimum Efficient Scale and Constant Returns to Scale

question

Minimum Efficient Scale

answer

The smallest output at which LRAC reaches its minimum.

question

Long Run Average Cost Curve: Increasing Costs

answer

Diseconomies of scale and results in decreasing returns to scale

question

Constant Returns to Scale

answer

Firm's output must be increasing exactly in proportion to the increase in inputs

question

Decreasing Returns to Scale

answer

Output increases less than in proportion to inputs as the scale of a firm's production increases. Increasing cost firm

question

Long Run Average Cost Cure

answer

At every point on the LRAC curve, there is an associated Short-Run Average Total Cost (SRATC) curve tangent at that point

question

Rise in Price Factors

answer

Shifts LRAC upward

question

Fall in Price Factors

answer

Shifts LRAC downward

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