Economics
Long Run Production Cost
Long run production cost refers to the total cost incurred by a firm in the long term when all inputs, such as labor and capital, can be varied. This includes both fixed and variable costs. Understanding long run production costs is crucial for firms to make decisions about production levels, pricing, and resource allocation in the long term.
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10 Key excerpts on "Long Run Production Cost"
eBook - PDFEconomics
Theory and Practice
- Patrick J. Welch, Gerry F. Welch(Authors)
- 2016(Publication Date)
- Wiley(Publisher)
This may be making a statement about how much we value exercise and physi- cal activity. Does this focus on campus and community fitness replace the need for employers to provide well- ness programs or does it make their provision more important? LONG‐RUN COSTS The long run is the time frame long enough for a business to regard all its factors of production as variable and none as fixed. Calculating the cost of production in the long run means determining the cost of a given level of output when a business can alter the amounts of any and all of its resources. In the long run, production costs are not divided between fixed and variable because all factors, and therefore all costs, are variable. Table 12.7 gives the long‐run costs of constructing from zero through 10 houses by a hypothetical home builder. The second column of Table 12.7 gives the long‐run total cost of constructing these houses. Notice that long‐run total cost increases as more houses are produced and that, because there are no fixed factors or costs, it is zero when no houses are produced. Long‐run total cost is used to calculate long‐run average total cost, which is determined in the same way as short‐run average total cost: Total cost is divided by the quantity of output produced. Long‐run average total cost is shown in the third column of Table 12.7. Long‐run marginal cost can also be calculated from long‐run total cost: It is the change in long‐run total cost as one more unit of output is produced. Economists like to focus on the pattern of long‐run average total cost when ana- lyzing the behavior of production and its costs in the long run. Figure 12.3 plots the long‐run average total cost from Table 12.7. Notice that, at first, long‐run average total cost decreases as the level of output increases.
eBook - PDFMicroeconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 7 Production and Cost in the Firm 153 7-4 Costs in the Long Run So far, the analysis has focused on how costs vary as the rate of output increases in the short run for a firm of a given size. In the long run, all inputs that are under the firm’s control can be varied, so there is no fixed cost. The long run is not just a succession of short runs. The long run is best thought of as a planning horizon . In the long run, the choice of input combinations is flexible. But once the size of the plant has been selected and the concrete has been poured, the firm has fixed costs and is operating in the short run. Firms plan for the long run, but they produce in the short run. We turn now to long-run costs. 7-4a Economies of Scale Recall that the shape of the short-run average total cost curve is determined primarily by increasing and diminishing marginal returns from the variable resource. A differ-ent principle shapes the long-run cost curve. If a firm experiences economies of scale , long-run average cost falls as the scale of the firm expands. Consider some sources of economies of scale. A larger firm size often allows for larger, more specialized machines and greater specialization of labor. For example, compare the household-size kitchen of a small restaurant with the kitchen at a McDonald’s. At low rates of output, the smaller kitchen produces meals at a lower average cost than does McDonald’s. But if produc-tion in the smaller kitchen increases beyond, say, 100 meals per day, a kitchen on the scale of McDonald’s would make meals at a lower average cost.
eBook - PDFEconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 7 Production and Cost in the Firm 153 7-4 Costs in the Long Run So far, the analysis has focused on how costs vary as the rate of output increases in the short run for a firm of a given size. In the long run, all inputs that are under the firm’s control can be varied, so there is no fixed cost. The long run is not just a succession of short runs. The long run is best thought of as a planning horizon. In the long run, the choice of input combinations is flexible. But once the size of the plant has been selected and the concrete has been poured, the firm has fixed costs and is operating in the short run. Firms plan for the long run, but they produce in the short run. We turn now to long-run costs. 7-4a Economies of Scale Recall that the shape of the short-run average total cost curve is determined primarily by increasing and diminishing marginal returns from the variable resource. A differ- ent principle shapes the long-run cost curve. If a firm experiences economies of scale, long-run average cost falls as the scale of the firm expands. Consider some sources of economies of scale. A larger firm size often allows for larger, more specialized machines and greater specialization of labor. For example, compare the household-size kitchen of a small restaurant with the kitchen at a McDonald’s. At low rates of output, the smaller kitchen produces meals at a lower average cost than does McDonald’s. But if produc- tion in the smaller kitchen increases beyond, say, 100 meals per day, a kitchen on the scale of McDonald’s would make meals at a lower average cost.
eBook - PDF- Rhona C. Free(Author)
- 2010(Publication Date)
- SAGE Publications, Inc(Publisher)
10 COSTS OF PRODUCTION Short Run and Long Run LAURENCE MINERS Fairfield University W hen most people other than economists think of costs, they may logically think about their household budget and the cost of heating their home or the cost of sending a daughter or son to college. Economists, however, are more apt to talk about the prices of these items and consider how households allocate a finite income to meet family needs. When economists con-sider costs, they refer most often to the production deci-sions of firms—what and how much they decide to produce, how they produce it, and how much it costs. The usual free-market assumption of profit-maximizing behav-ior by firms is not necessary for this discussion. All firms, from small local nonprofits, such as community libraries, to large international corporations attempt to operate effi-ciently. That is, they strive to produce the most output at the lowest possible cost. The purpose of this chapter is to consider the produc-tion decisions and associated costs that firms face. It should be clear at the outset that this discussion will be incomplete in that it will not consider the profitability of a firm or the particular market in which it operates. A firm may produce a safe, reliable product at minimum cost, using the best technology, but fail if there is insuffi-cient demand for its product. Similarly, an inefficient, lumbering, pollution-generating company may make sig-nificant profits if it dominates its industry and has a loyal following of customers. This is not meant to be seen as an endorsement of any particular industry structure. Rather, it is to point out that the costs and production decisions that firms make address only part of the economic sur-vival equation. One must also consider the demand for the firm's product and the market in which it operates.
eBook - PDFMicroeconomics
Theory and Applications
- Edgar K. Browning, Mark A. Zupan(Authors)
- 2019(Publication Date)
- Wiley(Publisher)
• See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable. • Show how input price changes affect a firm’s cost curves. • Differentiate between a firm’s long-run and short-run cost curves. • Explain the impact of learning by doing on production cost. • Understand how the minimum efficient scale of production is related to market structure. • Describe how cost curves can be applied to the problem of controlling pollution. • Cover economies of scope—is it cheaper for one firm to produce products jointly than it is for separate firms to produce the same products independently? • Overview how cost functions can be empirically estimated through surveys and regression analysis. • Short-Run Cost of Production 183 The Nature of Cost Although a firm’s cost of production is commonly thought of as its monetary outlay, this view of cost is too narrow for our purposes. Because, as economists, we wish to study the way cost affects output choices, employment decisions, and the like, cost should include sev- eral factors in addition to outright monetary expenses. As discussed in Chapter 1, the rele- vant cost to a firm of using its resources in a particular way is the opportunity cost of those resources—the value the resources would generate in their best alternative use. Opportunity cost reflects both explicit and implicit costs. Recall that explicit costs arise from transactions in which the firm purchases inputs or the services of inputs from other parties; they are usu- ally recorded as costs in conventional accounting statements and include payroll, raw mate- rials, insurance, electricity, interest on debt, and so on. Implicit costs are those associated with the use of the firm’s own resources and reflect the fact that these resources could be employed elsewhere. Although implicit costs are difficult to measure, we must take them into account in analyzing the actions taken by a firm.
eBook - ePubMedia Economics
Applying Economics to New and Traditional Media
- Colin Hoskins, Stuart McFadyen, Adam Finn(Authors)
- 2004(Publication Date)
- SAGE Publications, Inc(Publisher)
economically efficient ; there must be no other method available that is capable of producing the output for a smaller total value (cost) of inputs. Total cost depends on the number of each factor employed and the price per unit that the firm has to pay.5.1 Short Run, Long Run, and Very Long RunProduction opportunities—ways of combining inputs to change output—differ according to the length of time considered. The quantities of some inputs can be changed very rapidly, whereas a considerable time is needed to change others. For example, energy use can be changed by the turn of a switch, whereas building a plant or installing machinery is likely to take months or even years.The short run is defined as a time period insufficient to change the input level of items such as capital equipment and plant. Such capacity factors are fixed in the short run. However, quantities of inputs such as labor and raw materials can be changed and are thus variable factors even in the short run.The long run is a period of sufficient length that all factors of production are variable, but the basic technology of production is given.The very long run is a period during which the technological possibilities available to the firm may also change.5.2 Production in the Short RunA production function shows the maximum quantity of a product that can be produced in a time period for each set of alternative inputs. In the short run, the production function is governed by the Law of Diminishing Returns . This law states that after a certain level of input of the variable factor, each additional unit of the variable factor, employed in conjunction with a fixed quantity of another factor, adds less to total product than the previous unit. (In production theory, economists use the word “product” to mean “output”; the words are used interchangeably).The law is stated as if there were only two factors, one variable and the other fixed, but this is a simplification; the law applies for any number of variable and fixed factors. Also, note the similarity between the Law of Diminishing Returns and the Law of Diminishing Marginal Utility.
eBook - ePub- Israel M. Kirzner(Author)
- 2015(Publication Date)
- University of Chicago Press(Publisher)
Another use of the term “long run,” which is also closely related to the length of the time span permitted for adjustments to work themselves out, is in the traditional notion of “long-run costs.” Whereas the traditional use of the notion depends heavily on the distinction between “fixed factors” and “variable factors,” this distinction is expressed in terms of length of the period during which the producer is imagined to make his adjustments. 7 For Viner’s cost curves the “short run” is a “period which is long enough to permit of any desired change of output technologically possible without altering the scale of plant, but which is not long enough to permit of any adjustment of scale of plant.” 8 The “long run” is “a period long enough to permit each producer to make such technologically possible changes in the scale of his plant as he desires.” 9 By using this notion of “long run” to qualify “costs,” one is not referring to a more distant prospective horizon (as in “long-term profits”), nor to consequences that unfold as longer periods of time are permitted to elapse (as in “long-term demand”); one is referring, rather, to the range of options facing a producer who is assured of all the time needed to make any adjustment he might wish to introduce. 4. This traditional distinction between long-run costs and short-run costs in terms of fixed and variable factors has been strongly attacked by Alchian. “In fact,” Alchian argues, “there is no such fixed factor in any interval other than the immediate moment when all are fixed. . .. There are no technological or legal restraints preventing one from varying any of his inputs. . .
eBook - PDF- David Besanko, Ronald Braeutigam(Authors)
- 2020(Publication Date)
- Wiley(Publisher)
• Sunk costs are costs that have already been incurred and cannot be recovered. Nonsunk cost are costs that can be avoided if certain choices are made. • The long run is the period of time that is long enough for the firm to vary the quantities of all its inputs. The short run is the period of time in which at least one of the firm’s input quantities cannot be changed. • An isocost line shows all combinations of inputs that entail the same total cost. When graphed with quantity of labor on the horizontal axis and quantity of capital on the vertical axis, the slope of an isocost line is minus the ratio of the price of labor to the price of capital. • At an interior solution to the long-run cost- minimization problem, the firm adjusts input quantities so that the marginal rate of technical substitution equals the ratio of the input prices. Equivalently, the ratio of the marginal product of one input to its price equals the corresponding ratio for the other inputs. • At corner point solutions to the cost-minimization problem, the ratios of marginal products to input prices may not be equal. • An increase in the price of an input causes the cost- minimizing quantity of that input to go down or stay the same. It can never cause the cost-minimizing quantity to go up. • An increase in the quantity of output will cause the cost-minimizing quantity of an input to go up if the input is a normal input and will cause the cost- minimizing quantity of the input to go down if the input is an inferior input. • The expansion path shows how the cost-mini- mizing quantity of inputs varies as quantity of output changes. • An input demand curve shows how the cost- minimizing quantity of the input varies with its input price. • The price elasticity of demand for an input is the percentage change in the cost-minimizing quantity of that input with respect to a 1 percent change in its price.
eBook - PDF- Kumar, K Nirmal Ravi(Authors)
- 2021(Publication Date)
- Daya Publishing House(Publisher)
This is given by: DLRTC/DY. Thus, This ebook is exclusively for this university only. Cannot be resold/distributed. LRMC equals the slope of LRTC curve with reference to a tangent drawn from Y-axis. Now let us summarize the long-run costs (one absolute cost and two per unit costs) as shown through Table 2.13. Table 2.13: Summary of Long Run Costs Sl.No. Type of Cost Definitions Relationship with other Costs 1. LRTC LRTC refers to the total expenditure incurred in the long run production programme to produce a certain level of output. Unlike SRTC, LRTC is associated with only variable factors, as all the factors are variable in the long run. Sum of total costs 2. LRATC LRATC is the per unit cost incurred by a firm in a long run production programme LRATC = LRTC/Y 3. LRMC LRMC is the rate at which LRTC changes per unit change in output in the long run production programme LRMC = DLRTC/DY i. Cost analysis in the short run and long run production programmes It is important for a farmer to recover the costs incurred in short run (fixed costs and variable costs) and in long run (variable costs) production programmes. The following are the important aspects: Recovery of costs : As discussed earlier, in short run, the farmer incurs both fixed costs and variable costs. So, the farmer tries to recover these costs from the gross returns he derive from the business. But, in short run, due to price fluctuations, the gross returns may or may not recover the TC incurred by the farmer. At times of fall in market prices, the gross returns tend to be lower than TC incurred by the farmer. In such case, the distinction between fixed costs and variable costs in the short run production programme guides the farmer to plan the business. But, in long run, the farmer has to recover the TC incurred in the production programme, as all costs are variable costs in the long run.
eBook - PDF- Kumar, K Nirmal Ravi(Authors)
- 2021(Publication Date)
- Daya Publishing House(Publisher)
The following are the important reasons: Figure 5.31 : Modern Theory - Long Run per Unit Cost Curves. This ebook is exclusively for this university only. Cannot be resold/distributed. Figure 5.31.1 : Modern Theory – Shapes of LRATC Curve. a. Production and Managerial Costs In the long run, since all the costs become variable, production and managerial costs should be studied to analyze their influence on output, so that, average cost can be worked out. As output increases, production cost/unit of output will fall, while managerial cost/unit of output may rise. But, the fall in production costs outweighs the rise in managerial costs so that, the LRATC falls with increase in output. This is discussed below. Production Costs If the firm increases its production, the average production costs fall steeply at the beginning and then gradually. This is because, in the beginning, the firm enjoys substantial technical economies of large scale production, thereby, the average production costs fall steeply. But, after a certain level of output, all or most of the economies have been achieved by the firm, thereby, the firm reaches the Minimum Optimal Scale or Minimum Efficient Scale (MES), beyond which, economies of scale will not be achieved at a significant level. The MES is defined as the scale of production, where the internal economies of scale have been fully exploited. It corresponds to the lowest point on the LRATC curve and it refers to an output range over which a business achieves productive efficiency. So, the quantity of output that achieved at the lowest possible LRATC is termed as MES. The larger the MES, the greater the magnitude of economies of scale. This is shown as output OQ at lowest possible LRATC, QA in Panel B of the Figure 5.32 . It is important that, the MES is not a single output level rather, it comprises a range of output levels, where the firm achieves constant RTS and has reached the lowest feasible cost per unit in the long run.
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