LONG-RUN COST

COST FUNCTION IN LONG- RUN Cost function in Long- Run may be

defined as the mathematical relationship btw cost of a product and the various determinants of cost.

C= F [Q, T ,Pf, K]

LONG- RUN COSTIn long run ,all inputs to a firms production may be

changed.

There are no fixed inputs, fixed cost.

The cost that are incurred on the fixed factors like plant, building, machinery, etc., are known as Long- run cost, .

In the long run , however even the fixed costs become variable costs as the size of the firm or scale of production increases.

LONG- RUN AVERAGE COSTIt is aperios of time during which the firm can

vary all of its input

The firm moves from one plant to another in long run

Long run cost of production is the least

posible cost of producing any given level of output when all individual factors are variable

LONG-RUN AVERAGE COST CURVE

LONG-RUN AVERAGE COST CURVELong- run average cost curve depicts the

functional relationship between output & the long run cost of production.

It envelops the set of U- shaped short run average cost curves corresponding to different plant sizes.

LRAC Curve is reflecting economic of scale when negatively slop & diseconomies of scale when positivey sloped.

ECONOMIES OF SCALE A Firms LRAC declines as output increases, the

firm is said to be experiencing economies of scale.

It can be classified in to two: 1.Real economies of scale 2. Pecunaic economies of scale

........... Real economies of scale

Pecuniary economies of scale

Are those associated with a reduction in physical quantit y of

inputs , raw materials, various types of labour and various types

of capital

Are realised from paying lower prices for the factors used in the production and distribution of the product , due to bulk buying by

thr firmas its size increases

Economics of Scale Scale means size. Economies of scale: the decrease in per

unit costs as the quantity of production increases and all resources are variable

Diseconomies of scale: the increase in per unit costs as the quantity of production increases and all resources are variable

Constant returns to scale: unit costs remain constant as the quantity of production is increased and all resources are variable

Economies of ScaleIn the longer run all inputs are variable, so

only economies of scale can influence the shape of the long-run cost curve.

The minimum efficient level of production is

reached once the size of the market expands to a size large enough so that firms can take advantage of all economies of scale.

Diseconomies of ScaleDiseconomies of scale refer to decreases in

productivity which occur when there are equal increases of all inputs (no input is fixed).

Constant Returns to Scale Constant returns to scale is where long-

run average total costs do not change as output increases.

Average total cost

Cost

s p

er

un

it

$64 62 60 58 56 54 52 50 48

11 12 13 14 15 16 17 18 19 20 Quantity

Economies and Diseconomies of Scale

Economies of Scale

Diseconomies of Scale

Constant

retuArns to

Scale

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