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By the end of this section, you will be able to:

  • Calculate total cost
  • Identify economies of scale, diseconomies of scale, and constant returns to scale
  • Interpret graphs of long-run average cost curves and short-run average cost curves
  • Analyze cost and production in the long run and short run

The long run is the period of time when all costs are variable. The long run depends on the specifics of the firm in question—it is not a precise period of time. If you have a one-year lease on your factory, then the long run is any period longer than a year, since after a year you are no longer bound by the lease. No costs are fixed in the long run. A firm can build new factories and purchase new machinery, or it can close existing facilities. In planning for the long run, the firm will compare alternative production technologies    (or processes).

In this context, technology refers to all alternative methods of combining inputs to produce outputs. It does not refer to a specific new invention like the tablet computer. The firm will search for the production technology that allows it to produce the desired level of output at the lowest cost. After all, lower costs lead to higher profits—at least if total revenues remain unchanged. Moreover, each firm must fear that if it does not seek out the lowest-cost methods of production, then it may lose sales to competitor firms that find a way to produce and sell for less.

Choice of production technology

Many tasks can be performed with a range of combinations of labor and physical capital. For example, a firm can have human beings answering phones and taking messages, or it can invest in an automated voicemail system. A firm can hire file clerks and secretaries to manage a system of paper folders and file cabinets, or it can invest in a computerized recordkeeping system that will require fewer employees. A firm can hire workers to push supplies around a factory on rolling carts, it can invest in motorized vehicles, or it can invest in robots that carry materials without a driver. Firms often face a choice between buying a many small machines, which need a worker to run each one, or buying one larger and more expensive machine, which requires only one or two workers to operate it. In short, physical capital and labor can often substitute for each other.

Consider the example of a private firm that is hired by local governments to clean up public parks. Three different combinations of labor and physical capital for cleaning up a single average-sized park appear in [link] . The first production technology is heavy on workers and light on machines, while the next two technologies substitute machines for workers. Since all three of these production methods produce the same thing—one cleaned-up park—a profit-seeking firm will choose the production technology that is least expensive, given the prices of labor and machines.

Three ways to clean a park
Production technology 1 10 workers 2 machines
Production technology 2 7 workers 4 machines
Production technology 3 3 workers 7 machines

Questions & Answers

In some cases, barriers to entry may lead to monopoly.
Sung Reply
what is economic
Abdul Reply
define elasticity of demand
Shalom Reply
difference between microeconomics and microeconomics?
Angel Reply
what is the relationship between production possibility frontier and opportunity cost
Tamali
difference between microeconomics and macroeconomics ?
Angel
what is another word for international trade
Shalom Reply
what is economy society
Shalom Reply
what is law of demand
Sangita Reply
The law of demand states that quantity purchased varies inversely with the price. In other words, the higher the price the lower the demanded quantity.
what monetary policy
Suleiman Reply
what monetary policy ?
Suleiman
if demand and costfuncion of cournot duopolist is, y=20-0.p, y= y1+y2, c1=30+2y1,c2=50+10y2, then find profit function of each firms and their reaction function and also the profit of each firms
Gemeda Reply
what is answer for this question
Gemeda
what is cournot duopoly
Gemeda
It is a model of imperfect competition in which two firms with identical cost functions compete with homogeneous products in a static settling
what is elasticity of deman
Douglas Reply
this is the degree of responsiveness of demand to a little or slight Change in the price of the commodity, price of other commodity and income
Stanley
A comprehensive note on Agriculture
Ezekiel Reply
what is economics
GAME
Economics is a social science that studies human behaviour as a relationship between ends and scarce means which HV alternative uses
Jude
what do we mean price elasticity in other words
Blessed Reply
the degree of responsiveness of s slight change in price of a good at a given time
Jude
what is production possibility frontier
Tamali
adam smith views in economics
Renatus Reply
ok
Amadu
what is a market demand schedule
Blessed Reply
what is budget
Balla
A budget is a plan you make on how you spend your money 💰🤑 either for the month or a year
Blessed
is a scheduled of a consumer, which wisely determind , the commodities and the cost of price in a market
Theophilus
What is demand curve
mohamed Reply
Types of demand curve
mohamed
demand curve is a showing the aggregate of demand whether falling from right to the left in the table above
BULAMA
demand curve is the graphical representation of various quantities of a commodity bought at various prices
Blessed
What is demand
mohamed
demand curve , is a graphical presentation of a demand goods and prices
Theophilus
demand curve is the graphical representation of various quantities of a commodity bought at various prices
Shalom

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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