8.8 the firm's long run output decision

• Long-Run Output Decision:

  • In the long run, all inputs (like labor, capital) are variable.
  • The firm's main objective is to maximize profit or minimize loss.
  • The decision rule in the long run: choose the output where Marginal Revenue (MR) = Long-Run Marginal Cost (LMC).
• 1. Long-Run Average Cost (LAC):

  • LAC represents the average cost per unit of output when all inputs can be adjusted.
  • If the price is greater than LAC (firm covers all costs), the firm makes profits.
  • If the price is less than LAC, the firm incurs losses.
• Marginal Revenue (MR) Curve:

  • The MR curve represents the additional revenue gained by selling one more unit of output.
  • Firms maximize profit by producing where MR = LMC.
• LAC Curve (Long-Run Average Cost): Shows the lowest average cost at which a firm can produce different levels of output in the long run.
• LMC Curve (Long-Run Marginal Cost): Reflects the change in total cost as the firm changes its output level.
• MR Curve (Marginal Revenue): Represents the additional revenue from selling an extra unit of output.
• Long-Run Output Decision:

  • If price is greater than or equal to LAC1: The firm produces Q1 and stays in business since it covers its costs.
  • If price is less than LAC1: The firm should shut down because it cannot cover its long-run average cost.
• equilibrium point where LMC = MR and represents the optimal output level
• The firm should produce where LMC = MR and where the firm can cover its LAC.
• If the price falls below LAC1, the firm should exit the market.
• • The long-run decision focuses on minimizing costs while ensuring that all variable inputs (labor and capital) are fully adjustable.
• Long-Run Output Decision:

  • In the long run, all inputs (like labor, capital) are variable.
  • The firm's main objective is to maximize profit or minimize loss.
  • The decision rule in the long run: choose the output where Marginal Revenue (MR) = Long-Run Marginal Cost (LMC).
• Marginal Revenue (MR) Curve:

  • The MR curve represents the additional revenue gained by selling one more unit of output.
  • Firms maximize profit by producing where MR = LMC.
• Long-Run Average Cost (LAC):

  • LAC represents the average cost per unit of output when all inputs can be adjusted.
  • If the price is greater than LAC (firm covers all costs), the firm makes profits.
  • If the price is less than LAC, the firm incurs losses.
• LAC Curve (Long-Run Average Cost): Shows the lowest average cost at which a firm can produce different levels of output in the long run.
• LMC Curve (Long-Run Marginal Cost): Reflects the change in total cost as the firm changes its output level.
• MR Curve (Marginal Revenue): Represents the additional revenue from selling an extra unit of output.
• the equilibrium point where LMC = MR and represents the optimal output leve
• • If price is greater than or equal to LAC1: The firm produces Q1 and stays in business since it covers its costs.
  • If price is less than LAC1: The firm should shut down because it cannot cover its long-run average cost.
• • The firm should produce where LMC = MR and where the firm can cover its LAC.
  • If the price falls below LAC1, the firm should exit the market.
  • The long-run decision focuses on minimizing costs while ensuring that all variable inputs (labor and capital) are fully adjustable.