Chapter 8- Inputs, Production, and Costs in the Long Run PDF

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Notes copied from personal notebook on chapter 8 of TopHat online textbook....

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Chapter 8: Inputs, Production, and Costs in the Long Run ● In the long run, a firm must choose how much of all of its inputs (land, capital, and labor) to use ● Marginal analysis: a comparison of additional benefits to additional costs in order to maximize total well-being ○ If the last dollar spent on each good provides the same marginal utility as the last dollar spent on every other good, a consumer will have maximized their total satisfaction ● As long as the marginal product per dollar spent on one input is greater than that of another, the input with the greater marginal product per dollar spent should be substituted for the other input ● Marginal product per dollar spent = MPL/w = MPK/r ○ MPL: marginal product per labor: the increase in product resulting from increasing one unit of labor ○ W: wage rate ○ MPK: marginal product of capital: the change in total output that results from the firm hiring one more unit of capital ○ R: cost of capital ● Costs are minimized when MPL/w = MPK/r ● There are no fixed costs in the long run ● Increasing all inputs, so the law of diminishing marginal returns does not apply (in the long run) ● It is possible for long-run average costs to decrease as firm size and output expand ● Constant returns to scale: occurs when long-run average total cost remains constant as the quantity of output increases ● Economies of scale: when long-run average total cost decreases as the quantity of output increases ○ Typical manufacturing plants and very large firms ○ 3 causes: ■ Specialization of all inputs ● Larger firms allow for more specialization, which increases productivity ■ Dimensional factors ● Buying larger equipment (ex: a larger storage bin costs 2x as much but holds 4x as much) ● Improved equipment ■ Larger volume equipment

● In some industries, the capital used is not easily divisible among smaller firms (ex: assembly line) ● Diseconomies of scale: when long-run average total cost increases as the quantity of output increases ○ Exist because very large firms often have costs that smaller firms don’t ● Long-run average cost curve: ○ U-shaped ■ First negative part is the economies of scale ■ Zero slope part is the constant returns to scale ■ Last positive part is the diseconomies of scale ○ Increase in input costs causes long-run curve to shift up ○ Decrease in input costs or improvement in technology causes curve to shift down...