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[3]: 209 [nb 1] Because the production function determines the variable cost function it necessarily determines the shape and properties of marginal cost curve and the average cost curves. [4] 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 ...
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 ...
[25] [26] [27] In this case, with perfect competition in the output market the long-run equilibrium will involve all firms operating at the minimum point of their long-run average cost curves (i.e., at the borderline between economies and diseconomies of scale).
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] There are three principal cost functions (or 'curves') used in microeconomic analysis:
The shape of the long-run marginal and average costs curves is influenced by the type of returns to scale. The long-run is a planning and implementation stage. [ 6 ] [ 7 ] Here a firm may decide that it needs to produce on a larger scale by building a new plant or adding a production line.
By not producing, the firm loses only the fixed costs. As a result, the firm's short-run supply curve has output of 0 when the price is below the minimum AVC and jumps to output such that P = MC(Q) {\displaystyle {\text{P = MC(Q)}}} for higher prices, where MC {\displaystyle {\text{MC}}} denotes marginal cost.
Assume a firm produces clothing. When the quantity of the output varies from 5 shirts to 10 shirts, fixed cost would be 30 dollars. [ 1 ] In this case, the average fixed cost of producing 5 shirts would be 30 dollars divided by 5 shirts, which is 6 dollars.
Thus with firms possessing U-shaped long-run average cost curves, perfect competition, with (1) firms small enough relative to the overall market that they cannot individually influence the product's market price, and with (2) free entry, leads in the long run to a situation in which no firm is making economic profit, and in which firms are of ...