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g -Ru n Co sts an d Out put Decisi on s © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 2 of 36 Chapter Outline 9 Long-Run Costs and Output Decisions Short-Run Conditions and Long- Run Directions Maximizing Profits Minimizing Losses The Short-Run Industry Supply Curve Long-Run Directions: A Review Long-Run Costs: Economies and Diseconomies of Scale Increasing Returns to Scale Constant Returns to Scale Decreasing Returns to Scale Long-Run Adjustments to Short-Run Conditions Short-Run Profits: Expansion to Equilibrium Short-Run Losses: Contraction to Equilibrium The Long-Run Adjustment Mechanism: Investment Flows toward Profit Opportunities Output Markets: A Final Word Appendix: External Economies and Diseconomies and the Long-Run Industry Supply Curve CH APTER

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g -Ru n Co sts an d Out put Decisi on s © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 3 of 36 We begin our discussion of the long run by looking at firms in three short-run circumstances: 1 firms earning economic profits, 2 firms suffering economic losses but continuing to operate to reduce or minimize those losses, and 3 firms that decide to shut down and bear losses just equal to fixed costs. CH APTER

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g -Ru n Co sts an d Out put Decisi on s © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 4 of 36 breaking even The situation in which a firm is earning exactly a normal rate of return. Example: The Blue Velvet Car Wash MAXIMIZING PROFITS TABLE 9.1 Blue Velvet Car Wash Weekly Costs TOTAL FIXED COSTS TFC TOTAL VARIABLE COSTS TVC 800 WASHES TOTAL COSTS TC = TFC + TVC 3,600 1. Normal return to investors 1,000 1. 2. Labor Materials 1,000 600 Total revenue TR at P = 5 800 x 5 4,000 2. Other fixed costs maintenance contract, insurance, etc. 1,000 1,600 Profit TR TC 400 2,000 CH APTER

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g -Ru n Co sts an d Out put Decisi on s © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 5 of 36 Graphic Presentation FIGURE 9.1 Firm Earning Positive Profits in the Short Run CH APTER

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