Page 199 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes Suppose a firm can use two types of plants. Its short-term cost curve is a small plant SAC . There is a
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big plant, its short-term cost is SAC . Of these two the firm is planning to invest in the most profitable
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plant. On various quantities of prodution both short-term cost curves can be determined with the aid of
various quantities of output produced by the plant from which the average cost will be minimal.
In Fig. 9.14 Two types of plants appear to have been short-term average cost curves. Small plant's
average cost curve is SAC while large plant's average cost cuve is SAC . If the firm wants to produce
2
1
quantities of OM it will select the smaller plant. The plant produces the lowest average unit costs
with the help of OM on BM, as known from SAC . By contrast, OM unit to produce large plant,
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the average cost will rise to AM. But if the firm is to produce ON the unit will use the larger plant.
Minimum average cost of production of the plant by the ON unit can be used by the CN, ON by the
plant to produce smaller amounts DN will increase the average cost. If we take the value of the firm’s
plant has lots of different sizes Each level of the minimum cost of the plant to reveal the long-term
average cost curve (LAC) will be called. Therefore, The production will be done by both small plant
(SAC ) and large plant (SAC ) on the minimum average cost OM and ON respectively.
1
2
Fig. 9.14

A

SAC 1 SAC 2
A
D
Cost (`) B C LAC

A X
M N
Output

You Must Understand this

The position of minimum input cost of short-term and long-term is not always same. This is because in the position
of the minimum term at least one stage of production instrument remains where as this is not necessary in the long
run. So the minimum output ratio can be maintained at all levels of production, but in short it is possible only at the
production stage. Produce minimal short-term situation is similar to the level at which only the long-term expansion
path is located. Therefore, the short-term cost of long-term cost curve is tangent to the curve at the same point.

In Fig. 9.15, long-term average cost (LAC) is shown. Long-term average cost curve, the average cost
of each short course is tangent to the curve at some point. The long-term average cost touch point
short of the minimum point M to the left of the parts is below average cost. This is because the
minimum point M to the long-term average cost (LAC) curve has a negative slope. The short-term
average cost (SAC) will have a negative slope of the curve, because the touch point on the two parts
of the curve will be going up. After point M, the long-term average cost curve is rising up. Point M in
the long term and short term minimum average cost is a minimum average cost-equal to each other.

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