An Introduction to Cost and Production Functions by David F. Heathfield

By David F. Heathfield

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The long-run average product curve can be derived from this by simply dividing the output by one of the inputs . 10. Average product is rising between (0)and (a)-the increasing returns to scale range . It is constant between (a) and (b) with CRTS and falls beyond (b) where there are DRTS. 10 Average Product Curve Average output (a) (b) Average product curve o (c) Input variable factor(s) . Assuming a production function: q = f(Vb V2) and assuming that one input is fixed; V2 = V2, we can derive a relation between the quantity of VI and total output.

The demand curve is the average revenue curve since it shows how much the firm gets on average for each unit of production at each level of output. The MR curve will be below the demand curve, because the extra revenue coming from an additional unit of sales will be lower than the price. An additional unit will force price down not only for the extra unit but also for all other units. The marginal revenue of that unit must accordingly be lower than its price. For simplicity, we shall consider the case with a linear demand curve.

We observe also that the minimum of AVC occurs at a rate of output lower than the minimum of ATC and, of course , that the value of AVCmin is lower than ATC min • Note also that the marginal cost curve intersects with the AVC and the ATC curves at their minimum points. The minimum SR average total cost is the 'capacity' point. Note This is the economic capacity (the design point) of the plant. It is not the 'physical' capacity level. 7 The Relation Between Long- and Short-run Cost Curves The relation between the long- and the short-run cost curves is similar to the relation between the long- and short-run isoquant map.

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