© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Production and Cost in the Long Run The key difference between the short run and the long run is that there are no diminishing returns in the long run.The key difference between the short run and the long run is that there are no diminishing returns in the long run. Diminishing returns occur because workers share a fixed facility. In the long run the firm can expand its production facility as its workforce grows.Diminishing returns occur because workers share a fixed facility. In the long run the firm can expand its production facility as its workforce grows.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Expansion and Replication The firm’s long-run total cost is the total cost of production in the long run when a firm is perfectly flexible in its choice of inputs and can choose a production facility of any size.The firm’s long-run total cost is the total cost of production in the long run when a firm is perfectly flexible in its choice of inputs and can choose a production facility of any size. The firm’s long-run average cost of production (LAC) is the long-run total cost divided by the quantity of output produced.The firm’s long-run average cost of production (LAC) is the long-run total cost divided by the quantity of output produced.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Expansion and Replication The replication process—i.e. doubling the output produced in the original operation—means that long-run total cost increases proportionately with the quantity produced.The replication process—i.e. doubling the output produced in the original operation—means that long-run total cost increases proportionately with the quantity produced. Long-Run Costs: Total and Average Cost Output: Rakes per minute Long-Run Total Cost Long-Run Average Cost 3.5 $ 70 $20 7 $ 84 $12 14$168$12 28$336$12

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Decrease in Output and Indivisible Inputs An input is indivisible if it cannot be scaled down to produce a smaller quantity of output.An input is indivisible if it cannot be scaled down to produce a smaller quantity of output. Most production processes have at least one indivisible input.Most production processes have at least one indivisible input. In general, if there are indivisible inputs, the long-run average total cost curve will be negatively sloped.In general, if there are indivisible inputs, the long-run average total cost curve will be negatively sloped.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Decrease in Output and Indivisible Inputs When inputs cannot be scaled down to produce a smaller quantity of output, the long-run average cost of production will rise (from point f to point e).When inputs cannot be scaled down to produce a smaller quantity of output, the long-run average cost of production will rise (from point f to point e). Output: Rakes per minute Long-Run Average Cost 3.5$20 7$12 14$12 28$12

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Examples of Indivisible Inputs A cable-TV firm uses a cable running throughout its territory.A cable-TV firm uses a cable running throughout its territory. A shipping firm uses a large ship to carry TV sets from Japan to the United States.A shipping firm uses a large ship to carry TV sets from Japan to the United States. A steel producer uses a large blast furnace.A steel producer uses a large blast furnace. A hospital uses imaging machines (for X-rays, CAT scans, and MRIs).A hospital uses imaging machines (for X-rays, CAT scans, and MRIs). A pizzeria uses a pizza oven.A pizzeria uses a pizza oven.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Decrease in Output and Labor Specialization A second reason for higher average long-run costs in a smaller operation is that labor will be less specialized in the small operation.A second reason for higher average long-run costs in a smaller operation is that labor will be less specialized in the small operation. A jack of all trades is a master of none.A jack of all trades is a master of none. In a large operation, each worker specializes in fewer tasks, thus, is more productive than his or her counterpart in a small operation.In a large operation, each worker specializes in fewer tasks, thus, is more productive than his or her counterpart in a small operation.