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0 12 0 12 TVC
1 12 10 22
80 2 12 16 28
3 12 21 33
4 12 28 40
60 5 12 40 52
6 12 60 72
7 12 91 103
40
20
TFC
0
0 1 2 3 4 5 6 7 8
fig
Total costs for firm X
100 TC
TVC
80
40
20
TFC
0
0 1 2 3 4 5 6 7 8
fig
Average and marginal costs
MC
Costs (£)
Outputfig(Q)
Average and marginal costs
MC
AC
AVC
Costs (£)
x
AFC
Outputfig(Q)
Average and marginal physical product
Diminishing returns
b set in here
Output
MPP
c
Output
APP
MPP
20 \ £2 > 32 \ £8
10 > 4
Cost minimisation
Cost minimisation
MPK \ PK = MPL \ PL
tangency of isocost & isoquant
Scale expansion path & long run
costs
Vary K & L TPP rises (no. of factories)
At an output of 100
LRAC = TC1 / 100
100
TC
O
1
fig
Units of labour (L)
Deriving an LRAC curve from an isoquant map
Units of capital (K)
700
600
500
400
300
100 200
TC TC TC TC TC TC TC
O
1 2 3 4 5 6 7
fig
fig
Units of labour (L)
Deriving an LRAC curve from an isoquant map
Units of capital (K)
Expansion path
700
600
500
400
300
100 200
TC TC TC TC TC TC TC
O
1 2 3 4 5 6 7
fig
fig
Units of labour (L)
A typical long-run average cost curve
LRAC
Costs
O Output
fig
A typical long-run average cost curve
O Output
fig
Returns to scale
(i) Increasing returns
LRAC
Economies of scale
plant level economies
multi-plant economies
Diseconomies of scale
Conclusion
Cost minimisation - long run
Profit = Revenue - Cost