economics for managers - session 09

8/3/2019 Economics For Managers - Session 09

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PSG INSTITUTE OF MANAGEMENT

MBA 2011-13 BATCH

I TrimesterSession IX- For Batch C and DCost function-Long Run & Cost Analysis

13/09/11EFM Faculty P.Uday Shankar1

ECONOMICS FOR MANAGERS


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Units oflabour(L)

Units of Capital (K)

0 1 2 3 4 5 6 7 8 9 10

0 0 0 0 0 0 0 0 0 0 0 0

1 0 25 52 74 90 100 108 114 118 120 121

2 0 55 112 162 198 224 242 252 258 262 264

3 0 83 170 247 303 342 369 384 394 400 403

4 0 108 220 325 400 453 488 511 527 535 540

5 0 125 258 390 478 543 590 631 653 663 670

6 0 137 286 425 523 598 655 704 732 744 753

7 0 141 304 453 559 643 708 766 800 814 825

8 0 143 314 474 587 679 753 818 857 873 885

9 0 141 318 488 609 708 789 861 905 922 935

10 0 137 314 492 617 722 809 887 935 953 967


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Cost oflabourLx20

Cost of Capital (K)Kx10

0 10 20 30 40 50 60 70 80 90 100

0 0 0 0 0 0 0 0 0 0 0 0

20 0 25 52 74 90 100 108 114 118 120 121

40 0 55 112 162 198 224 242 252 258 262 264

60 0 83 170 247 303 342 369 384 394 400 403

80 0 108 220 325 400 453 488 511 527 535 540

100 0 125 258 390 478 543 590 631 653 663 670

120 0 137 286 425 523 598 655 704 732 744 753

140 0 141 304 453 559 643 708 766 800 814 825

160 0 143 314 474 587 679 753 818 857 873 885

180 0 141 318 488 609 708 789 861 905 922 935

200 0 137 314 492 617 722 809 887 935 953 967


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Long Run Cost Schedule


1 2 3 4 5 6

Least Combination of

Output Labour Capital Total Cost(w=5,r=10)

Long runaveragecost LAC

Long runmarginalcost

LMC100 10 7 120 1.20 1.20

200 12 8 140 0.70 0.20

300 20 10 200 0.67 0.60

400 30 15 300 0.75 1.00

500 40 22 420 0.84 1.20

600 52 30 560 0.93 1.40

700 60 42 720 1.03 1.60


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Long Run Total Cost Curve



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Logic for LTC, LAC and LMC


When marginal cost (0.20 and 0.60) isless than average cost (0.70 and 0.67),each additional unit produced addsless than average cost to the total

cost, so average cost should decrease.When marginal cost

(1.00,1.20,1.40,1.60) is greater thanaverage cost (0.75, 0.84,0.93,1.03),each additional unit of the goodproduced adds more than average costto the total cost, so average cost mustbe increasing over this range ofoutput.

Thus, marginal cost must be equal to


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Returns to Scale


Q=f(L,K)

Returns to scale is the

proportionate change inoutput to constantproportions of change in

inputs. f(cL,cK) = zQ


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Returns to Scale- Stages


1. Increasing Returns to Scale ifz > c(output goes up proportionatelymore than the increase in inputusage)

2. Constant Returns to Scale ifz = c(output goes up by the sameproportion as the increase in input

usage)3. Decreasing returns to Scale ifz

economics for managers - session 09

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