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Economics notes

Long Run Production Function:

➡️ The short run average cost (SRAC) curve is U-shaped, with the lowest point representing the minimum average cost. This is because as production increases, fixed costs are spread over a larger output, resulting in lower average costs.
➡️ The marginal cost (MC) curve is initially downward sloping, then increases as production increases. This is because initially, as production increases, the marginal cost decreases due to increasing returns to scale, but eventually, diminishing returns to scale set in, resulting in an increase in marginal cost.
➡️ The SRAC curve intersects the MC curve at the minimum point of the SRAC curve, which is the optimal level of production. This is because at this point, the marginal cost is equal to the average cost, resulting in the lowest cost of production.

What is the long run production function and how does it differ from the short run production function?

The long run production function is a theoretical concept that describes the relationship between inputs and outputs in the long run, when all inputs can be varied. In contrast, the short run production function assumes that at least one input is fixed. The long run production function is important because it allows firms to optimize their production processes by choosing the most efficient combination of inputs.

What are the key factors that affect the shape of the long run production function?

The shape of the long run production function is determined by a number of factors, including the availability and cost of inputs, the level of technology, and the scale of production. For example, if the cost of labor is high relative to the cost of capital, the long run production function may be more capital-intensive. Similarly, if a firm has access to advanced technology, it may be able to produce more output with the same inputs.

How can a firm use the long run production function to maximize profits?

A firm can use the long run production function to maximize profits by choosing the combination of inputs that produces the highest level of output at the lowest cost. This involves finding the point on the production function where the marginal product of each input is equal to its cost. By doing so, the firm can ensure that it is using its resources efficiently and producing the maximum amount of output for a given level of input.

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