Economies and Diseconomies of Scale

Economies of scale refer to the reduced costs per unit arising due to an increase in the total output, leading to a downward sloping average cost curve. Diseconomies of scale occur when the output increases to such a great extent that the cost per unit starts increasing, causing the average cost curve to slope upward.

The shape of the marginal product curve is explained by the Law of Variable Proportions, which states that as we increase the quantity of only one input while keeping other inputs fixed, the total product increases initially at an increasing rate, then at a decreasing rate, and finally at a negative rate. This results in the downward sloping marginal product curve.

The Law of Variable Proportions states that as we increase the quantity of only one input while keeping other inputs fixed, the total product increases initially at an increasing rate, then at a decreasing rate, and finally at a negative rate.

The reality shows that the marginal product must eventually decrease because there is always some perfect ratio of the factors of production. The optimum ratio can only be maintained by adjusting the quantity of the input, leading to the eventual decrease in marginal product.

The role of MPL (Marginal Product of Labor) is to correspond to the optimal K:L ratio, where MPL should be at its highest value to maintain the optimal capital to labor ratio.

The expansion path of a firm is the curve obtained by joining the points of tangency between isoquants and iso-cost lines. It represents the combinations of inputs that minimize cost for each level of output. The significance lies in the fact that if the firm wants to expand its operations, it would have to move along this path. The expansion path helps in understanding the firm's cost-minimizing input combinations for different levels of output.

A firm may choose to expand by successively increasing its level of cost or its expenditure on the inputs, thereby using more of inputs and producing more output. Alternatively, the firm may decide to expand by increasing its level of output per period, achieved by increasing the expenditure on the inputs. The first approach leads to movement along the expansion path, while the second approach involves shifting the expansion path outward.

In a Cournot duopoly model, two firms compete in the quantity of output they produce. Each firm assumes that its competitor's output remains constant when determining its own output level. The equilibrium occurs when both firms reach a point where neither has an incentive to change its output quantity. This results in a stable and balanced market situation.

Cournot assumed that there are two firms, each with a mineral well and operating with zero costs. The market has a straight-line demand curve. The firms compete by setting their output quantities simultaneously, taking into account the other firm's output level.

The isoquant map represents different combinations of inputs that produce the same level of output. The iso-cost lines represent the combinations of inputs that can be purchased for a given level of cost. The expansion path is derived by joining the points of tangency between isoquants and iso-cost lines. It shows the cost-minimizing input combinations for each level of output, providing insights into the firm's production and cost behavior.