Production and Cost Analysis II
Production and Cost Analysis II
Production and Cost Analysis II
Production
and Cost
Analysis II
Prepared by:
Kevin Richter, Douglas College
Charlene Richter,
British Columbia Institute of Technology
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Average
total cost
Minimum efficient
level of production
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2006 McGraw-Hill Ryerson
Limited. All rights reserved.
Economies of Scale
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Economies of Scale
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Economies of Scale
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Economies of Scale
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Economies of Scale
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Constant
returns
to scale
Diseconomies
of scale
Long run
average
total cost
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2006 McGraw-Hill Ryerson
Limited. All rights reserved.
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Economies of Scale
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Economies of Scale
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Monitoring Costs
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Doubling inputs
results in:
Slope of the
LRAC
Increasing returns
to scale (IRTS;
economies of
scale)
downward
horizontal
upward
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Increasing
Returns to
Scale
Constant
returns
to Scale
Decreasing
Returns to
Scale
Long run
average
total cost
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2006 McGraw-Hill Ryerson
Limited. All rights reserved.
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Importance of Economies of
Scale
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Importance of Economies of
Scale
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Envelope Relationship
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Envelope Relationship
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Envelope Relationship
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LRATC
SRMC1
SRATC4
SRATC1
SRMC2
SRMC4
SRATC2 SRATC3
SRMC3
Q*
2006 McGraw-Hill Ryerson
Limited. All rights reserved.
Quantity
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Economies of scope.
Learning by doing and technological change.
Many dimensions.
Unmeasured costs.
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Economies of Scope
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Economies of Scope
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Economies of Scope
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Economies of Scope
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Many Dimensions
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Many Dimensions
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Unmeasured Costs
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Economists Include
Opportunity Cost
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Production and
Cost Analysis II
End of Chapter 9
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Isocost/Isoquant
Analysis
Chapter 9 Appendix
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Isocost/Isoquant Analysis
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Isocost/Isoquant Analysis
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Isocost/Isoquant Graph
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Isocost/Isoquant Graph
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Isoquant Curve
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G
C
D
E
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Units of labour
2006 McGraw-Hill Ryerson
Limited. All rights reserved.
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Isoquant Curve
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Isoquant Curve
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Isoquant Curve
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Isoquant Curve
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Isoquant Map
Q100
Q60
Q40
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Slope = -Plabour/Pmachines
=-5/3
D
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A
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Units of labour
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MPlabour Plabour
MPlabour MPmachines
so that
MPmachines Pmachines
Plabour
Pmachines
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A
MPlabour/MPmachines =Plabour/Pmachines
C
Q2
Q1
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Units of labour
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Isocost/Isoquant
Analysis
End of Chapter 9 Appendix
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