Professional Documents
Culture Documents
Chapter 9
THE COST STRUCTURE OF
FIRMS IN THE LONG RUN
9- 2
Learning Outcomes
Profit-maximizing firms use an input mix such that the ratio
of marginal products of inputs equals the ratio of input
prices
If input prices change, methods of production will change
to use fewer of those inputs that have become relatively
expensive and more of those that have become relatively
cheaper
There is a family of short-run ATC curves, each one
tangent to the long-run ATC curve
The long-run cost curve can take on various shapes
depending on the scale effects when all inputs are allowed
to vary at once
Changes in technology are often endogenous responses
to changing economic signals
9- 3
9- 4
Principle of Substitution
(MPK ) / (MPL) > (PK ) / (PL)
The firm substitute capital for labour, the method of
production will be more capital and less labour.
(MPK ) / (MPL) < (PK ) / (PL)
The firm substitute labour for capital, the method of
production will be more labour and less capital.
According to the law of diminishing return, firm use
more of one factor, the marginal productivity
reduces. So, the firm follow the substitution till
(MPK ) / (MPL) = (PK ) / (PL)
9- 5
9- 6
9- 7
K/L
18
12
-6
- 6.0
-3
- 3.0
-3
- 1.5
-2
- 0.67
12
-1
- 0.33
18
-1
- 0.17
9- 8
Quantity of K
20
16
12
Q=6
f
4
12
Quantity of L
16
20
9- 9
Properties of Isoquant
Isoquants are negatively sloped
If one input is increased, other inputs have to be decreased.
An Isoquant Map
Quantity of K
9- 10
Q =12
Q=10
Q=4
0
Quantity of L
Q=6
Q= 8
9- 11
Producers Equilibrium
Isocost line
The determination of least cost method of
output.
The effect of a change in input prices on
cost and input proportions.
9- 12
LRAC
Attainable levels of cost
qm
Output per period
9- 13
LRAC
E0
Attainable levels of cost
c0
q0
qm
Output per period
9- 14
c2
c0
LRAC
E0
E1
c1
q0
q1
qm
Output per period
9- 15
9- 16
9- 17
qm
Output per period
9- 18
SRATC
LRAC
c0
q0
qm
Output per period
9- 19
9- 20
LRAC
9- 21
SRATC
LRAC
c0
q0
Output per period
9- 22
SRATC
LRAC
c0
q0
Output per period
9- 23
SRATC
SRATC
LRAC
c0
q0
Output per period
9- 24
SRATC
SRATC
LRAC
c0
q0
Output per period
9- 25
SRATC
SRATC
LRAC
c0
q0
qm
Output per period
9- 26
9- 27
9- 28