Cost Curves and Production Functions
Assuming that factor prices are constant, the production function determines all cost functions. The variable cost curve is the inverted short-run production function or total product curve and its behavior and properties are determined by the production function. Because the production function determines the variable cost function it necessarily determines the shape and properties of marginal cost curve and the average cost curves.
If the firm is a perfect competitor in all input markets, and thus the per-unit prices of all its inputs are unaffected by how much of the inputs the firm purchases, then it can be shown that at a particular level of output, the firm has economies of scale (i.e., is operating in a downward sloping region of the long-run average cost curve) if and only if it has increasing returns to scale. Likewise, it has diseconomies of scale (is operating in an upward sloping region of the long-run average cost curve) if and only if it has decreasing returns to scale, and has neither economies nor diseconomies of scale if it has constant returns to scale. In this case, with perfect competition in the output market the long-run market equilibrium will involve all firms operating at the minimum point of their long-run average cost curves (i.e., at the borderline between economies and diseconomies of scale).
If, however, the firm is not a perfect competitor in the input markets, then the above conclusions are modified. For example, if there are increasing returns to scale in some range of output levels, but the firm is so big in one or more input markets that increasing its purchases of an input drives up the input's per-unit cost, then the firm could have diseconomies of scale in that range of output levels. Conversely, if the firm is able to get bulk discounts of an input, then it could have economies of scale in some range of output levels even if it has decreasing returns in production in that output range.
Read more about this topic: Cost Curve
Famous quotes containing the words cost, curves, production and/or functions:
“The Fountaine of parents duties is Love....Great reason there is why this affection should be fast fixed towards their children. For great is that paine, cost, and care, which parents must undergoe for their children. But if love be in them, no paine, paines, cost or care will seeme too much.”
—William Gouge (20th century)
“One way to do it might be by making the scenery penetrate the automobile. A polished black sedan was a good subject, especially if parked at the intersection of a tree-bordered street and one of those heavyish spring skies whose bloated gray clouds and amoeba-shaped blotches of blue seem more physical than the reticent elms and effusive pavement. Now break the body of the car into separate curves and panels; then put it together in terms of reflections.”
—Vladimir Nabokov (18991977)
“From the war of nature, from famine and death, the most exalted object which we are capable of conceiving, namely, the production of the higher animals, directly follows. There is grandeur in this view of life, with its several powers, having been breathed into a few forms or into one; and that, whilst this planet has gone cycling on according to the fixed law of gravity, from so simple a beginning endless forms most beautiful and most wonderful have been, and are being, evolved.”
—Charles Darwin (18091882)
“Adolescents, for all their self-involvement, are emerging from the self-centeredness of childhood. Their perception of other people has more depth. They are better equipped at appreciating others reasons for action, or the basis of others emotions. But this maturity functions in a piecemeal fashion. They show more understanding of their friends, but not of their teachers.”
—Terri Apter (20th century)