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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

what happens when maximum price is placed above equilibrium price
Christian Reply
the demand curve falls
Ewerton
explain the term : law of demand and it's function
Evacon Reply
law of demand state that the higher the price the lower the quantity demanded and vice versa
Moka
Está correto, sua função também é a de estabilizar o mercado do produto em questão, seu preço, sua produção, etc.
Ewerton
higher******
Umar
what are raw materials
Fatmah Reply
the basic material from which a product is made. "these could be used as raw material"
ADAMU
fatmah raw material, also known as a feedstock, oky is a basic material that is used to produce goods, finished products, energy, or intermediate materials that are feedstock for future finished products. just to make outputs.
ADAMU
oh yeah I got it .. thank you for your help 😊
Fatmah
hello my dear friends
Au
hello
Fatmah
hello
Muhammad
hy
Sortema
Any notes on ppf.?
George
can anyone clarify features of internal efficiency with reference to education
Sortema
in an open economy, the GDP is measured as ?
jacobs Reply
what is Labour of supply.
Eshmel Reply
it is called supply of labour
Emmanuel
it is the total number of those the producer is expected to employ at a given time and at an existing wage rate
Emmanuel
it is a sum number of employees the manufacturer wish to employ in a period of time , and at a given wage rate
Evacon
if the price of yam increases what will happen to demand curve?
Lawal Reply
the demand curve will decrease
Fatmah
with table and diagrametic illustration
Usama Reply
ok
Mustafe
if the price elasticity of demand for a commodity is zero the demand curve is
Aryan Reply
the demand curve is inelastic
Emmanuel
this is because price bring about a lesser change in quantity demanded
Emmanuel
how are we going to draw scale of preference
Achor Reply
how do we identify choice
Achor
how do we identify opportunity cost
Achor
opportunity cost is the forgone alternative. in oder words, it is the sacrificed goods or service for another. thus, the item you did not buy with the resources you have thereby buying another one is called opportunity cost. thanks
John
Opportunity cost considers only the next best alternative to an action, not the entire set of alternatives, and takes into account all of the differences between the two choices.
ADAMU
IAC curve is geueraly
Subham Reply
what are the benefits or tourism?
Maake Reply
please I don't understand the division of labor increase
Dery Reply
Labour increasing according to demand of company or as the condition of profit and standards or weight of working level ,,,,
SHOM
Please can someone help me With the demand of labour.
Eshmel
what are the basic concept of economics
Busanga Reply
end mean and scarcity
Dery
What the term economics?
Nuran Reply
economic is the study of mankind in the ordinary business life
Dery
want to find how can a geography teacher can contribute to the economic development of a country .
Bernadette Reply
how are u
Usama
i am fine
Purnima
it can help to prevent world wars 😂😂😂😂
Vedaant
it can help to prevent world wars 😂😂😂😂
Vedaant

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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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