Chapter 6: Production and Cost Analysis in the Long Run 56
CHAPTER 6: PRODUCTION AND COST ANALYSIS IN
THE LONG RUN
OVERVIEW
This chapter introduces students to long-run production and cost. In the long-run, managers need to
make decisions regarding strategies to minimize the costs of production when the scale of
production is also variable. All inputs are variable allowing for substitution between inputs. Costs
may be reduced by changing the combination of inputs used in the production process or by
changing the entire scale of production
OUTLINE OF TEXT MATERIAL
I. Introduction
A. In the long-run, all inputs in a production process are variable.
B. Managers face more decisions in the long-run because it is possible to change the
combinations of all inputs used.
II.
III. Model of a Long-Run Production Function
A. Long-Run Production Function: A production function showing the relationship
between a flow of inputs and the resulting flow of output where all inputs are
variable.
1. Equation 6.1: Q = f(L, K)
where:
Q = quantity of output
L = quantity of labor (variable)
K = quantity of capital (variable)
2. A change in the scale of production affects long-run production costs.
B. Input Substitution: The feasibility of substituting one input for another in a
production process.
Copyright © 2015 Pearson Education Ltd.
, Chapter 6: Production and Cost Analysis in the Long Run 57
1. The firm can use either a labor-intensive or a capital-intensive method of
production.
2. Labor-Intensive Method of Production: A production process that uses large
amounts of labor relative to the other inputs to produce the firm’s output.
3. Capital-Intensive Method of Production: A production process that uses
large amounts of capital relative to the other inputs to produce the firm’s
output.
C. The Technology of the Production Process
1. Input substitution depends on technology of the production process,
prices of the inputs and the set of incentives facing the given producer.
2. The development of capital-intensive assembly lines is a case of an
improvement in the technology. Specific examples in the text include are the
automobile and fast-food industries.
3. Better quality played a role in the airline industry’s adoption of Radio-
Frequency ID (RFID) baggage tags and railroad industry’s adoption of
plastic railroad ties made from recycled materials.
4. Mining companies deploy high tech equipment to lower their costs of
production and improve worker safety.
IV. Model of a Long-Run Cost Function
A. Long-Run Average Cost (LRAC): The minimum average or unit cost of producing
any level of output when all inputs are variable.
B. Figure 6.1 illustrates how the LRAC curve is derived from the short-run average
total cost (SATC) curves. The curve that envelopes each SATC curve showing the
different scales of production is the LRAC curve.
Copyright © 2015 Pearson Education Ltd.
CHAPTER 6: PRODUCTION AND COST ANALYSIS IN
THE LONG RUN
OVERVIEW
This chapter introduces students to long-run production and cost. In the long-run, managers need to
make decisions regarding strategies to minimize the costs of production when the scale of
production is also variable. All inputs are variable allowing for substitution between inputs. Costs
may be reduced by changing the combination of inputs used in the production process or by
changing the entire scale of production
OUTLINE OF TEXT MATERIAL
I. Introduction
A. In the long-run, all inputs in a production process are variable.
B. Managers face more decisions in the long-run because it is possible to change the
combinations of all inputs used.
II.
III. Model of a Long-Run Production Function
A. Long-Run Production Function: A production function showing the relationship
between a flow of inputs and the resulting flow of output where all inputs are
variable.
1. Equation 6.1: Q = f(L, K)
where:
Q = quantity of output
L = quantity of labor (variable)
K = quantity of capital (variable)
2. A change in the scale of production affects long-run production costs.
B. Input Substitution: The feasibility of substituting one input for another in a
production process.
Copyright © 2015 Pearson Education Ltd.
, Chapter 6: Production and Cost Analysis in the Long Run 57
1. The firm can use either a labor-intensive or a capital-intensive method of
production.
2. Labor-Intensive Method of Production: A production process that uses large
amounts of labor relative to the other inputs to produce the firm’s output.
3. Capital-Intensive Method of Production: A production process that uses
large amounts of capital relative to the other inputs to produce the firm’s
output.
C. The Technology of the Production Process
1. Input substitution depends on technology of the production process,
prices of the inputs and the set of incentives facing the given producer.
2. The development of capital-intensive assembly lines is a case of an
improvement in the technology. Specific examples in the text include are the
automobile and fast-food industries.
3. Better quality played a role in the airline industry’s adoption of Radio-
Frequency ID (RFID) baggage tags and railroad industry’s adoption of
plastic railroad ties made from recycled materials.
4. Mining companies deploy high tech equipment to lower their costs of
production and improve worker safety.
IV. Model of a Long-Run Cost Function
A. Long-Run Average Cost (LRAC): The minimum average or unit cost of producing
any level of output when all inputs are variable.
B. Figure 6.1 illustrates how the LRAC curve is derived from the short-run average
total cost (SATC) curves. The curve that envelopes each SATC curve showing the
different scales of production is the LRAC curve.
Copyright © 2015 Pearson Education Ltd.
