ECON201 - Chapter 8 Notes

Chapter Overview

• Title: Producers in the Long Run
• Edition: Seventeenth Canadian Edition
• Source: Ragan: Microeconomics

Learning Objectives

• Understand profit maximization and input cost allocation.
• Recognize why firms substitute inputs based on price changes.
• Differentiate between short-run and long-run cost curves.
• Comprehend technological change and innovation in the very long run.

Key Concepts

8.1 The Long Run: No Fixed Factors

• Short Run vs Long Run: In the short run, at least one factor is fixed; in the long run, all inputs are variable.
• Technical Efficiency: Achieved when inputs are combined to maximize output.
• Profit Maximization: Requires choosing the technically efficient option with the lowest cost.

8.1.1 Technical Efficiency and Profit Maximization

• Cost Minimization: A result of profit maximization, where output is produced at the lowest cost.
• Substitution: If one factor can replace another while reducing costs, the firm should adjust.

8.2 Profit Maximization and Cost Minimization

• Capital (K) and Labour (L): Factors considered in cost minimization.
• Marginal Product per Dollar (MP/p): Should be equal for all factors to achieve cost minimization.
• Factor Price Changes: Firms adjust production methods based on factor price changes.

Long-Run Cost Curves

• Least-Cost Production: The method that minimizes cost for any given output level.
• Long-Run Average Cost (LRAC) Curve: Represents the lowest possible cost of production when all inputs are variable.
• Economies of Scale: When long-run average costs decrease as the scale of operations expands.

Figure 8-1: A Saucer-Shaped Long-Run Average Cost Curve

• Economies of Scale: Occur when output increases more than proportionally to inputs.
• Increasing Returns: More output is produced with increased inputs, reducing average cost.

Important Definitions

• Technical Efficiency: Optimal combination of inputs for maximum output.
• Profit Maximization: Achieving the lowest cost for a given output level.
• Economies of Scale: Reduction in average costs due to increased production scale.
• Principle of Substitution: Adjusting input use based on relative price changes.

Summary

• In the long run, firms aim to minimize costs and maximize profits by selecting the optimal combination of inputs.
• Changes in input prices lead to adjustments in production processes to maintain cost-effectiveness.
• Understanding long-run cost curves is essential to comprehend the cost dynamics of firms as they scale operations.

These notes provide a comprehensive overview of the concepts related to producers' behaviors and cost analyses in the long run, as discussed in Chapter 8 of ECON201.