# 7.3 The structure of costs in the long run

 Page 1 / 26

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.

 Production technology 1 10 workers 2 machines Production technology 2 7 workers 4 machines Production technology 3 3 workers 7 machines

what is micro economic
Microeconomics is that branch of economics which studies how small economic units like a consumer, a household,a firm or an industry do their economic activities n reach equillibrum states .It also studies how prices of commodities n factors are determined so is also called price theory
Arooja
I agree
Tom
Demand and supply is what determines the price level in a market
Meaning the higher the price increases, the lower the demand buyers place on the commodities and the lower the price, the higher the demand buyers place on the commodities.
Edem
The equilibrium determines the level of prices in the market and this equilibrium is established when demand and supply curves intersect.
khatoon
price of a hamburger rises demand for fish rises illustrate with appropriate curve and explain
An economy exprerience inflation when?
given a table of weeks worked and numbers of goods produced per week. help to culculate margin.
Odirile
there is a persistent rise in general prices and purchasing power of money decreses
khatoon
An economy experience inflation when prices if commodities rises than expected
Edem
The taste of preferences of consumers will drive demand
yep other things being equal ,demand for those goods will increase for which consumer develops tastes n preferences. contrary to it ,if the tastes n preferences are developed against the commodity its demand will decrease .suppose in an area people develop a taste for tea ,so its demand will go up
Arooja
n vice versa . Marisol are u stasfied with my answer.
Arooja
The price of the good or service meaning?
Marisol
What is consumer expectation?
Marisol
Any other explanation?
Marisol
marisol u share your explaination pls
OK
The law of demand states that all other things being equal the higher the price of a commodity the lower the quantity of the same commodity demanded inversely. This implies that anytime there is an increment on a price of certain commodity the demand of the same commodity decline.
Nana
consumer expectations are the households view point regarding the market changes. If people are expecting a positive change in the market their Marginal Propensity to Consume will increase and vive versa.
Marisol are you okay with my explanation?
Nana
yes. thankyou.
Marisol
welcome
Nana
The law of demand simply means that, at a each price of a commodity, the quantities to be purchased rises or decline while other determinants of price are held constant taking into consideration only "Price and the commodities"
Edem
what are the determinants of demand and explain each?
what is the price of the good or services meaning?
Marisol
marzi tumhari
Aryan
lol
Aryan
khud par le
Aryan
hahahah
Ahmar
commodities own price,price of related goods (substitutes ,complements),consumers income ,tastes n preferences,expectations...population size n distribution of income are augmented while concerning marked demand.
Arooja
market demand
Arooja
Define microeconomics and macroeconomics..
In free market economy who market resources?
Odirile
Can you please explain how GDP is calculated?
Odirile
yes GDP meas all product produced in Economy first the country have to calculate all goods produced then we have to see the market value of goods at final stage we have to mutliple final goods to their market price we get GDP
Wani
what is consumer expectation?
Marisol
suppose country are producing 10 goods price of per good is \$1 therefore GDP = 10 good × \$1 =\$ 10
Wani
Thank you for the answers @Wani
Odirile
most welcome odirile
Wani
what is micro and macro economic
Ahmar
Microeconomics is a science that which examines how people choose among alternatives available. Macroeconomics is a branch that focuses on impact of the aggregate economy.
Tom
what is the price of the good or service?
suppose price of per good is (ice-cream) is 5 the consumer are ready for buying 2 goods(2 ice creams) if price will increase from 5 to 10 per good then the consumer will demand only one good or one ice-cream because price is increased and his income is limited
Wani
Marisol
in law of demand we assume some factors constant some factors are income taste future preference constant
Wani
what is price of related goods or services?
Marisol
suppose your income per month is 10, 000 and your needs satisfied by these 10,000 if price of good will increase you need more than 10,000 to satisfy your needs that is why we says at higher price demand of goods decrease
Wani
What is the taste of preferences of consumers will drive demand?
Marisol
suppose you are eating pizza and u fell its taste good you will buy more pizza this called taste we assume in law of demand that taste of goods remain Same
Wani
related goods are either complementary goods are substitute goods
Wani
what is Consumer expectation?
Marisol
relationship between price and quantity? about the law of demand
P⬆️ Qd⬇️
DNA
what is law of demand?
Marisol
If Prince increases, Quantity demand will decrease and vice versa. So relationship b/w price and demand is inverse. There are some exceptions also. Like complementary goods and substitute goods.
DNA
any other answers? thankyou anyways. Twas a big help.
Marisol
the law of demand states that, "conditional on all else being equal, as the price of a good increases, quantity demanded decreases; conversely, as the price of a good decreases, quantity demanded increases".
DNA
law of demand says when price of good increase there demand will decrease and vice versa in short law of demand show negative relationship between price and demand of goods
Wani
All other factors like income, taste, preference, season shall remain constant
DNA
Rohi g Bilkul sahi farmov veh!
DNA
law of demand not apply on Griffen goods and luxurious goods
Wani
sir will u plz explain me why we add Griffen goods in aggregate demand no body explain me this question
Wani
definition of monopoly
Odirile
monopoly is a form of market where there is only one supplier , supplying the product . in other words monopoly means only one industry or enterprise are selling the product
Wani
what is monopolistic
Odirile
what are the determinants of demand and explain each?
Marisol
monopolistic competition is a form of market where there are many sellers selling differentiated product
Wani
bravo
Aryan
Aryan
determinants of demand are 1.income :- if income of a person increase its demand for products will increase 2 . price :- if price of product increase there demand will decrease and vice versa 3. taste :- if buyer feels taste of product good then his demand for that product will increase
Wani
there are 5 determinants of demand?
Marisol
yes another one is if there customer are more in Economy more good will be demand
Wani
and what is the last one? I mean the fifth one?
Marisol
the other one is related goods related goods are either substitute goods are complementary goods if goods are substitute then if price of good will increase then demand for its substitute will increase
Wani
thankyou ❤️
Marisol
What is the concept of rationality in economics
Remuneration 10000 Net trade surplus 8000 Provision for depreciation 500 Indirect taxation 700 subsides 1000 Net factor payments 500 using information above calculate: 1GDP at factor cost 2GDP at market Price 3GNP at market price 4National income
Odirile
rationality simply means that you will always go for best choice in the available set of choice.
Rahul
which actions would most likely shift the production possibilities frontier outwards?
Odirile
what is consumer expectation in economics?
Marisol
the factory that cause shift to PPC are labour force, price of inputs. use of technology etc.
Wani
Marisol where from you
Wani
Marisol
From the Philippines Sir.
Marisol
most welcome marisol
Wani
a. Assume that Good X is a Giffen good, illustrate and explain the income and substitution effects for a decrease in the price of good X.
as price of good X(assume as Griffen good) decrease income of the consumer increase , consumer will demand other goods rather than the Griffen goods thus at lower prices of good X it's demand will decrease.
Wani
what is law of demand
what is the law of demand
Hugo
What is the law of demand
Hugo
just considering the relationship between price and quantity, holding other factors constant.
Donation
when the price of a commodity increases, it's demand will decrease. and when the price of a commodity decreases, it's demand will increase, other things remaining the same or constant. That is called Law of Demand.
Azka
other things remained constant there is inverse relationship between price and quantity demand i .e when price of a commodity increased the demand of quantity will decrease and vice- versa.
khatoon
right @KhatoonNafisa
Azka
Other answers about the law of demand and how it relates between the price and quantity?
Marisol
sir define me prison of delima
it is a paradoxical situation, where two individuals acts for their self interest but don't achieve the optimal point.
Rahul
gays why we add Griffen goods in aggregate demand as we know Griffen goods have positive relationships that means if price increase demand of goods also increase .but in aggregate demand there is a negative relationship between price and aggregate output.
Wani
what is the concept of rationality in economics?
Odirile
explain the determinants of derive demand?