Page 133 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes Thus, depending upon the nature of returns to scale, there will be a relationship between LTC and
output, given factor prices. It is generally found that most industries and fi rms reap increasing
returns to scale to start with which are followed by constant returns to scale which give place to
decreasing returns to scale eventually. In this case, the long run total cost function fi rst would
increase at a decreasing rate and then increase at an increasing rate as shown in Figure 9.6. Such
a total cost function would be associated with a U-shaped long run average cost function.

From LTC curve we can derive the firm’s Long run Average Cost (LAC) curve. LAC is the Long

run Total Cost (LTC) divided by the level of the output (Q). That is,
LTC
LAC =
Q
Similarly, from the LTC curve we can also derive the Long run Marginal Cost (LMC) curve. This
measures the change in LTC per unit change in output and is given by the slope of the LTC curve.
That is,
Δ TC d(LTC)
LMC = or
Δ Q dQ
The relationships among the long run total cost, long run marginal cost with respect to output are
explained in the following Table 9.2 and Figure 9.6.
Figure 9.6

Table 9.2

Q LTC LAC LMC
0 0 - -
5 25 5.00 5
10 45 4.50 4
15 60 4.00 3
20 85 4.25 5
25 120 4.85 7
30 180 6.00 12

The graphs of above relationships are provided in Figure 9.7.

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