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Lecture Managerial economics (Ninth edition): Chapter 9 – Thomas, Maurice

Chapter 9 - Production and cost in the long run. In this chapter students will be able to: Draw a graph of a typical production isoquant and use the definition of an isoquant to explain why isoquants must be downward sloping, discuss the properties of an isoquant, construct isocost curves for a given level of expenditure on inputs,. | Chapter 9 Production & Cost in the Long Run Production Isoquants In the long run, all inputs are variable & isoquants are used to study production decisions An isoquant is a curve showing all possible input combinations capable of producing a given level of output Isoquants are downward sloping; if greater amounts of labor are used, less capital is required to produce a given output 9- Typical Isoquants (Figure 9.1) 9- Marginal Rate of Technical Substitution The MRTS is the slope of an isoquant & measures the rate at which the two inputs can be substituted for one another while maintaining a constant level of output 9- Marginal Rate of Technical Substitution The MRTS can also be expressed as the ratio of two marginal products: 9- Isocost Curves Represents amount of capital that may be purchased if zero labor is purchased • • • 9- Isocost Curves (Figures 9.2 & 9.3) 9- Optimal Combination of Inputs Two slopes are equal in equilibrium Implies marginal product per | Chapter 9 Production & Cost in the Long Run Production Isoquants In the long run, all inputs are variable & isoquants are used to study production decisions An isoquant is a curve showing all possible input combinations capable of producing a given level of output Isoquants are downward sloping; if greater amounts of labor are used, less capital is required to produce a given output 9- Typical Isoquants (Figure 9.1) 9- Marginal Rate of Technical Substitution The MRTS is the slope of an isoquant & measures the rate at which the two inputs can be substituted for one another while maintaining a constant level of output 9- Marginal Rate of Technical Substitution The MRTS can also be expressed as the ratio of two marginal products: 9- Isocost Curves Represents amount of capital that may be purchased if zero labor is purchased • • • 9- Isocost Curves (Figures 9.2 & 9.3) 9- Optimal Combination of Inputs Two slopes are equal in equilibrium Implies marginal product per dollar spent on last unit of each input is the same • 9- Optimal Input Combination to Minimize Cost for Given Output (Figure 9.4) 9- Optimization & Cost Expansion path gives the efficient (least-cost) input combinations for every level of output Derived for a specific set of input prices Along expansion path, input-price ratio is constant & equal to the marginal rate of technical substitution 9- Expansion Path (Figure 9.6) 9- Returns to Scale If all inputs are increased by a factor of c & output goes up by a factor of z then, in general, a producer experiences: Increasing returns to scale if z > c; output goes up proportionately more than the increase in input usage Decreasing returns to scale if z 9- Long-Run Costs Long-run total cost (LTC) for a given level of output is .