Economics 202: Intermediate Microeconomic Theory

1. Economics 202: Intermediate Microeconomic Theory • Any questions? I know, I know … what’s on the test? • Coverage for test …

2. Shape of Long-run AC curves LAC ($/q) IRS DRS LAC LAC CRS Output • Many are “U-shaped”, but some are “L-shaped” • L-shape  IRS/economies of scale are quickly exhausted, & CRS exist over a wide range of output • Result: both small & large firms can exist in same industry • LAC of small hospitals is 29% more than for large ones  declining LAC • IndustryLACsm/LAClg hospitals 129% electric power 112 banking 102 airlines 100 trucking 95 • Result: small banks & big banks exist

3. Market Structure & Long-run AC curves LAC ($/q) D industry LAC tech 1 LAC tech 2 30K .05Qtotal .5Qtotal Qtotal Output • Minimum Efficient Scale is the production scale at which AC is a minimum. • This will vary by industry because production technology differs and technology is in part responsible for declining LAC. • Key question: Where does LAC reach minimum compared to total demand? • If very low (.05Qtotal), then lots of firms in that industry. • If relatively high (.5Qtotal), then very few firms in that industry. • LAC tech 1: coffee shops, breweries LAC tech 2: cars, law firms, cola, planes

4. Min cost of producing 4 widgets is $80 (assuming w = r = $10), using K = L = 4 (point a) In the Long-run, the min cost way to produce Q = 12 is $120, using K = L = 6 (point c) a and c can also be interpreted as the points of max output for cost outlays of $80 or $120 IRS, DRS, or CRS? However, in the Short-run K is fixed at 4 machines, so the min cost to make Q=12 is higher, $140. Point b is (L,K) = (10,4) LR costs < SR costs of production LR vs. SR Cost-Minimization K 14 12 8 c 6 b 4 Q=12 a Q=4 L 4 6 8 10 12 14 • MRTS at b < w/r  the rate at which K can be substituted for L in production < rate at which K can be substituted for L in the market