|Production and Cost Analysis II|
AFTER READING THIS CHAPTER, YOU SHOULD BE ABLE TO:
In the long run a firm has the ability to change its scale of operation. Nothing is fixed, so there are no fixed costs; all costs are variable costs. Economies and diseconomies of scale determine the shape of the long-run average cost curve. If economies of scale are experienced then larger scales of operation result in lower average costs and the long-run average cost curve slopes downward. Diseconomies of scale exist when a firm gets larger and larger and experiences higher average costs of production. This occurs when the long-run average cost curve slopes upward.
This chapter discusses the envelope relationship that exists between short-run and long-run average costs. Because of this envelope relationship, long-run costs will always be less than or equal to short-run costs at the same level of output.
This chapter concludes with a look at the role of the entrepreneur in translating costs of production to supply as well as some of the problems of using cost analysis in the real world.
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