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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

identify and quantify five social costs and social benefits of building a school
Mokgobo Reply
identify and quantity five social costs and social benefits of building a hospital
Mokgobo
short run vs long run
Jean
is it true that the opportunity cost of unemployed labour is zero?
Wisdom Reply
no
Oigebe
give two forms of collusion
nondumiso Reply
1.Explicit Collusion: Also termed overt collusion, this occurs when two or more firms in the same industry formally agree to control the market .
Gafar
2.Implicit Collusion: Also termed tacit collusion, this occurs when two or more firms in the same industry informally agree to control the market, often through nothing more than interdependent actions. A prime example of implicit collusion is price leadership .
Gafar
explicit collusion: this occurs when two or more firms in the same industry legally agree to control the market
Panashe
implicit collusion this occurs when two or more firms in the same industry illegally agree to control the market
Panashe
what is responsible for investigating cases of collusion
nondumiso
reasons why a country maybe involved in international trade
Nde Reply
state five similarities and differences between money market and capital market
Victoria Reply
Give a Zimbabwean example of firms operating in an oligopoly market and illustrate using diagrams how a manager in such a market maximize profit
Pam Reply
what is an industry
EWAH Reply
An industry is the production of goods and related services within an economy
Prabhu
an industry is place where goods and services are produced for human consumption....
Usman
scarcity is the major course of economics problems. discuss
Abdulhameed Reply
please say about that it is interesting for us
Abayneh
what is economics
Michael Reply
economics is a social sciences that deals with the production distribution and consumption of goods and services produced.its study of behaviour between economic agents
rkesh
what is the formula for elasticity of demand
Ridwan
change in demand/change in variable variable may be price, income,
rkesh
seasonal unemployment
Enoch Reply
example agriculture
lungku
want and scarcity
Prince
why the average of revenue AR fun
Abba
What is monopoli
Gadrey Reply
What is monopoly
Gadrey
monopoly
Hanan
monipoly ..where one firm controls all the market
RAM
what is demand
Jafar Reply
demand is what one willing and enable to purchase at a given price over period of a time.
Micheal
what is marginal revenue
just
distinguish between commercialization and industrialization
Alhassan Reply
why division of labour increase economy level of production
Henry Reply
what is opportunity coast
Henry Reply
a benefit profit or value of something that must be given up to acquire achieve something else
ammara
thx
Henry

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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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