Long run Managerial Economics

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  • 1. COST FUNCTION IN LONG- RUN  Cost function in Long- Run may be defined as the mathematical relationship btw cost of a product and the various determinants of cost.  C= F [Q, T ,Pf, K]
  • 2. LONG- RUN COST  In long run ,all inputs to a firms production may be changed.  There are no fixed inputs, fixed cost.  The cost that are incurred on the fixed factors like plant, building, machinery, etc., are known as Long- run cost, .  In the long run , however even the fixed costs become variable costs as the size of the firm or scale of production increases.
  • 3. LONG- RUN AVERAGE COST It is aperios of time during which the firm can vary all of its input The firm moves from one plant to another in long run Long run cost of production is the least posible cost of producing any given level of output when all individual factors are variable
  • 4. LONG-RUN AVERAGE COST CURVE
  • 5. LONG-RUN AVERAGE COST CURVE Long- run average cost curve depicts the functional relationship between output & the long run cost of production. It envelops the set of U- shaped short run average cost curves corresponding to different plant sizes. LRAC Curve is reflecting economic of scale when negatively slop & diseconomies of scale when positivey sloped.
  • 6. ECONOMIES OF SCALE A Firms LRAC declines as output increases, the firm is said to be experiencing economies of scale. It can be classified in to two: 1.Real economies of scale 2. Pecunaic economies of scale
  • 7. ........... Real economies of scale Pecuniary economies of scale Are those associated with a reduction in physical quantit y of inputs , raw materials, various types of labour and various types of capital Are realised from paying lower prices for the factors used in the production and distribution of the product , due to bulk buying by thr firmas its size increases
  • 8. Economics of Scale  Scale means size. Economies of scale: the decrease in per unit costs as the quantity of production increases and all resources are variable  Diseconomies of scale: the increase in per unit costs as the quantity of production increases and all resources are variable Constant returns to scale: unit costs remain constant as the quantity of production is increased and all resources are variable
  • 9. Economies of Scale In the longer run all inputs are variable, so only economies of scale can influence the shape of the long-run cost curve. The minimum efficient level of production is reached once the size of the market expands to a size large enough so that firms can take advantage of all economies of scale.
  • 10. Diseconomies of Scale Diseconomies of scale refer to decreases in productivity which occur when there are equal increases of all inputs (no input is fixed).
  • 11. Constant Returns to Scale  Constant returns to scale is where long-run average total costs do not change as output increases.
  • 12. Costs per unit Economies and Diseconomies of Scale $64 62 60 58 56 54 52 50 48 Economies of Scale 1 1 12 13 Constant retuArns to Scale 14 15 Diseconomies of Scale Average total cost 16 17 18 19 20 Quantity
  • 13. THANK YOU