Chapter 7

Cost: Definition and Concepts

Marginal Cost: The marginal
cost of production is the
additional cost incurred in
producing 1 extra unit of output.
 PRODUCTION AND COSTS IN THE LONG RUN
•In the long run, there are no fixed factors; all factors of production can be
changed. Consequently, there are no fixed costs in the long run. Therefore, variable
costs equal total costs,
•Long run average cost curve: A curve that shows the lowest cost at which the firm
can produce any given level of output. The long run average cost curve is the
envelope of the short run average total cost curves.
•Economies of scale (increasing returns to scale): Exists when inputs are increased
by some percentage and output increases by a greater percentage. This causes
average costs to fall.
•Suppose inputs are increased by 10 % causing a 20% increase in output. This is an
example of increasing returns to scale (economies of scale).
Constant returns to scale: Exists when inputs are increases by some percentage and
output increased by the same percentage. This causes average costs to remain the
same.
•Diseconomies of scale (decreasing returns to scale): Exists when inputs are
increased by some percentage and output increases by a smaller percentage. This
causes average costs to increase.