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The Cost of Production and Profit Maximization: L SR, K
The Cost of Production and Profit Maximization: L SR, K
Chia-Hui Chen
Lecture 14
The Cost of Production and Profit
Maximization
Outline
1. Chap 7: Relation Between Long Run Cost and Short Run Cost
2. Chap 7: Economies of Scale
3. Chap 7: Economies of Scope, Learning
LAC is decreasing;
• if
LM C = LAC,
LAC is minimized;
• if
LM C > LAC,
LAC is increasing.
Cite as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT
OpenCourseWare (http://ocw.mit.edu), Massachusetts Institute of Technology. Downloaded on [DD Month
YYYY].
1 Relation Between Long Run Cost Short Short Run Cost 2
10
7 TCSR3
5
C
TCSR2
4
3 TCLR
TCSR1
0
0 1 2 3 4 5 6 7 8 9 10
q
Figure 1: Deriving Long Run Total Cost from Short Run Total Cost.
15
SMC3
10 SMC2 LMC
SMC1
C
SAC1 SAC2
SAC3
LAC
0
0 5 10 15
q
Figure 2: Deriving Long Run Average Cost and Marginal Cost from Short Run
Average Cost and Marginal Cost.
Cite as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT
OpenCourseWare (http://ocw.mit.edu), Massachusetts Institute of Technology. Downloaded on [DD Month
YYYY].
2 Economies of Scale 3
2 Economies of Scale
• Constant economies of scale:
• Economies of scale:
10
6
AC
C
0
0 1 2 3 4 5 6 7 8 9 10
q
Cite as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT
OpenCourseWare (http://ocw.mit.edu), Massachusetts Institute of Technology. Downloaded on [DD Month
YYYY].
3 Economies of Scope, Learning 4
1.8
1.6
1.4
1.2
Trucks
1 K=1.5 L=1.5
(1,1)
0.8
K=1 L=1
0.6 (0.7,0,7)
0.4
0.2
0
0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2
Cars
it is economies of scope;
• if
SC < 0,
it is diseconomies of scope.
The learning curve for a firm is shown in Figure 5, with the firm’s cumulative
output as the vertical coordinate, and amount of inputs needed to produce a
unit of output as the horizontal coordinate.
Learning causes a difference in cost between the new firm and the old firm
(see Figure 6).
Cite as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT
OpenCourseWare (http://ocw.mit.edu), Massachusetts Institute of Technology. Downloaded on [DD Month
YYYY].
3 Economies of Scope, Learning 5
10
8
Hours of Labor Per Unit of Output
0
0 1 2 3 4 5 6 7 8 9 10
Cumulative Number of Outputs Produced
10
8 AC
5
C
3 AC*
0
0 1 2 3 4 5 6 7 8 9 10
q
Cite as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT
OpenCourseWare (http://ocw.mit.edu), Massachusetts Institute of Technology. Downloaded on [DD Month
YYYY].
3 Economies of Scope, Learning 6
Cite as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT
OpenCourseWare (http://ocw.mit.edu), Massachusetts Institute of Technology. Downloaded on [DD Month
YYYY].