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Lecture Economics (9/e): Chapter 12 - David C. Colander

Chapter 12 - Production and cost analysis I. After reading this chapter, you should be able to: Distinguish technical efficiency from economic efficiency, explain how economies and diseconomies of scale influence the shape of long-run cost curves, explain the role of the entrepreneur in translating cost of production to supply, discuss some of the problems of using cost analysis in the real world. | Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 1 Chapter Goals Distinguish technical efficiency from economic efficiency Explain the role of the entrepreneur in translating cost of production to supply Explain how economies and diseconomies of scale influence the shape of long-run cost curves Discuss some of the problems of using cost analysis in the real world 2 Technical Efficiency and Economic Efficiency Technical efficiency in production means that as few inputs as possible are used to produce a given output When choosing among existing technologies in the long run, firms are interested in the lowest cost (economically efficient) methods of production The economically efficient method of production is the method that produces a given level of output at the lowest possible cost. It is the least-cost technically efficient process 3 Production Decisions Neither plant size or technology available is given Firms look at costs of various inputs and the technologies available for combining these inputs Firms have more options in the long run and they can change any input they want They choose the combination that offers the lowest cost 4 The Shape of the Long-Run Cost Curve All inputs are variable in the long run The law of diminishing marginal productivity does not apply in the long run The shape of the long-run cost curve is due to the existence of economies and diseconomies of scale 5 Economies of Scale An indivisible setup cost is the cost of an indivisible input for which a certain minimum amount of production must be undertaken before the input becomes economically feasible to use The cost of a blast furnace or an oil refinery is an example of an indivisible setup cost Production exhibits economies of scale when long-run average total costs decrease as output increases Indivisible setup costs create many real-world economies of scale These are shown by the downward sloping portion of the long-run average total cost . | Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 1 Chapter Goals Distinguish technical efficiency from economic efficiency Explain the role of the entrepreneur in translating cost of production to supply Explain how economies and diseconomies of scale influence the shape of long-run cost curves Discuss some of the problems of using cost analysis in the real world 2 Technical Efficiency and Economic Efficiency Technical efficiency in production means that as few inputs as possible are used to produce a given output When choosing among existing technologies in the long run, firms are interested in the lowest cost (economically efficient) methods of production The economically efficient method of production is the method that produces a given level of output at the lowest possible cost. It is the least-cost technically efficient process 3 Production Decisions Neither plant size or technology available is given Firms look at costs of various .