Long Run Cost Minimisation in Economics

The law of diminishing marginal returns states that as a firm increases one input while keeping all others constant, the marginal product of that input will eventually decrease.

An isoquant represents the efficient combinations of labor and capital that can produce a single level of output.

Returns to scale refer to the effect on output when all inputs are increased proportionately.

<p>Firms need to decide on the optimal combination of inputs to minimize the cost of production.</p> Signup and view all the answers

<p>In the short run, firms have limited flexibility to adjust inputs, while in the long run, all costs are variable and firms can optimize input combinations.</p> Signup and view all the answers

<p>Firms need to be aware of this law to avoid over-investing in a single input and experiencing diminishing returns.</p> Signup and view all the answers

<p>Isocost lines represent combinations of labour and capital that have the same cost, analogous to a budget line in consumer theory.</p> Signup and view all the answers

<p>Total Cost (TC) = wL + rK</p> Signup and view all the answers

<p>The slope of an Isocost line is -(w/r), representing the rate at which the firm can trade off labour for capital while keeping costs constant.</p> Signup and view all the answers

<p>The X-axis intercept (K=0) of an Isocost line represents the total cost divided by the price of capital (TC/r).</p> Signup and view all the answers

<p>Perfect Complement Isoquant curves represent inputs that are always used in a fixed proportion, similar to perfect complement Indifference Curves (ICs) in consumer theory.</p> Signup and view all the answers

<p>The Expansion Path connects optimal input combinations in the short run and long run, showing how inputs are adjusted to maximize output.</p> Signup and view all the answers

<p>Elasticity of Substitution gives a firm’s input-substitution opportunities-how easy/difficult is it for a firm to substitute inputs such that the output remains the same.</p> Signup and view all the answers

<p>It makes the Isocost line flatter, moving from C2 to C1.</p> Signup and view all the answers

<p>PED for Labour= percentage change in the cost minimising quantity of labour with respect to a 1 per cent change in the price of labor.</p> Signup and view all the answers

<p>Low Elasticity of demand of labor implies little substitution of Labour for Capital.</p> Signup and view all the answers

<p>As we move downwards on Isoquants, the MRTS changes substantially; Isoquants are nearly L shaped.</p> Signup and view all the answers

<p>Elasticity of Substitution indicates how easy or difficult it is for a firm to substitute inputs while maintaining the same output level.</p> Signup and view all the answers