By David F. Heathfield
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Extra info for An Introduction to Cost and Production Functions
C;",n C ma x. 12 Total, Average and Marginal Products So far we have represented the production function as an isoquant map but there are alternative representations, one of which is closely associated with the theory o f the firm. This alternative approach relies on the total, average and marginal product curves. Long Run In the long run when all inputs are variable we can show how total output grows as the level of inputs increases (in fixed proportion ). 9. / Total product curve Inputs As inputs increase from (0) to (a) output is increasing faster than inputs and hence there are increasing returns to scale.
This process will continue until the price has fallen to Pmin' The establishment of any new firm will thereafter lead to a market price below the lowest possible cost , and all firms will then make losses. Ultimately, this will lead to the closing of some firms, and the price will increase to Pmin aga in. e. flat bit of the LRAC cur ve). It must be remembered, however, that our reasoning is based on many simplifying assumptions. First, we assume that technology is fixed, so that the cost curves do not shift.
E. e. a point on the isoquant) such as to maximise profits. We shall analyse these two aspects in the context of a simple two-factor model. 2 The Isocost Line Let us assume that the prices of our two inputs, v 1 and PI and P2 respectively. 1) 28 Cost Functions and the Theory of the Firm 29 An isocost line is a line representing all combinations of VI and V 2 which can be purchased for a particular sum of money, at a constant (ISO) tot al cost , TC = TC. 3) and the intersections with the axes are TC / P I and TC / P 2 .