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In economics, a cost function represents the minimum cost of producing a quantity of some good. The long-run cost curve is a cost function that models this minimum cost over time, meaning inputs are not fixed. Using the long-run cost curve, firms can scale their means of production to reduce the costs of producing the good. [1]
[1] Alan Blinder, former vice president of the American Economics Association, conducted the same type of survey in 1998, which involved 200 US firms in a sample that should be representative of the US economy at large. He found that about 40% of firms reported falling variable or marginal cost, and 48.4% reported constant marginal/variable cost.
The Long Run Average Cost (LRAC) curve plots the average cost of producing the lowest cost method. The Long Run Marginal Cost (LRMC) is the change in total cost attributable to a change in the output of one unit after the plant size has been adjusted to produce that rate of output at minimum LRAC.
The first systematic analysis of the advantages of the division of labour capable of generating economies of scale, both in a static and dynamic sense, was that contained in the famous First Book of Wealth of Nations (1776) by Adam Smith, generally considered the founder of political economy as an autonomous discipline.
If the firm is a perfect competitor in all input markets, and thus the per-unit prices of all its inputs are unaffected by how much of the inputs the firm purchases, then it can be shown [1] [2] [3] that at a particular level of output, the firm has economies of scale (i.e., is operating in a downward sloping region of the long-run average cost ...
The relevant variables are p, w, x, and f(x). p is the price of the output, w is the price of the input, f(x) is the amount of output, and x is the amount of input.Thus, the profit-function can be written as the following:
Two different types of cost are important in microeconomics: marginal cost and fixed cost.The marginal cost is the cost to the company of serving one more customer. In an industry where a natural monopoly does not exist, the vast majority of industries, the marginal cost decreases with economies of scale, then increases as the company has growing pains (overworking its employees, bureaucracy ...
Diagram 1 illustrates firm 1's best response function, ″ (), given the price set by firm 2. Note, M C {\displaystyle MC} in the diagram stands for marginal cost, c {\displaystyle c} . The Nash Equilibrium ( N {\displaystyle N} ) in the Bertrand model is the mutual best response; an equilibrium where neither firm has an incentive to deviate ...