Output and Costs

Sessions 11-12:
Production and cost in the long run
 Long-Run Cost (all inputs vary)
• The behaviour of long-run cost depends on the firm’s production function,
which is the relationship between the maximum output attainable and the
quantities of both labour and capital
The Production Function

• The table shows the total product data for four quantities of capital
(factory sizes)

2 Economics 2ed: Global and Southern African Perspectives © 2013

 Long-Run Cost
• The greater the factory size, the larger is the output produced by any given
quantity of labour
• For a given factory size, the marginal product of labour diminishes as more
labour is employed
• For a given quantity of labour, the marginal product of capital diminishes as
the quantity of capital used increases
Diminishing Returns
• Diminishing returns occur as the quantity of labour increases for a given
factory size
Diminishing Marginal Product of Capital
Diminishing returns also occur with each quantity of labour as the quantity of
capital increases
Short-Run Cost and Long-Run Cost
• The minimum average total cost for a larger factory occurs at a greater
output than it does for a smaller factory because the larger factory has a
higher total fixed cost and therefore, for any given output, a higher average
fixed cost
3 Economics 2ed: Global and Southern African Perspectives © 2013
 Long-Run Cost

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 Long-Run Cost
Economies and Diseconomies of Scale
• Economies of scale are features of a firm’s technology that make average
total cost fall as output increases
• When economies of scale are present, the LRAC curve slopes downward
• Diseconomies of scale are features of a firm’s technology that make average
total cost rise as output increases
• When diseconomies of scale are present, the LRAC curve slopes upward

Minimum Efficient Scale

• A firm’s minimum efficient scale is the smallest output at which long-run
average cost reaches its lowest level.
• Output needed to achieve MES is dependent on capital intensity. Compare
MES of a fruit seller to that of an electricity generator!

5 Economics 2ed: Global and Southern African Perspectives © 2013

End of Part 3