Notes week 5 - Microeconomics

Lecture 5
Ceteris paribus; realistic?

->short run/time; at least one factor of production is fixed (mostly capital, more difficult to change)
marginal product of a single production factor (mostly labor) can be determined

->in the long run, all input factors are variable



Assumed the amount of both inputs is doubled;

- Produced output grows more than double; increasing returns to scale – economies of scale
- Produced output grows exactly double; constant returns to scale (in production)
- Produced output grows less than double; decreasing returns to scale – diseconomies of scale

A firm’s costs depend on its scale of production and the type of production technology used.




A large firm might be more profitable;

Cost advantages; greater bargaining power, specialization, fixed cost decreases with scale

Demand advantages; network effects (value of output rises with number of users)

But possible diseconomies of scale; additional layers of bureaucracy



Determine increasing, decreasing or constant returns out of production function

With A > 0 and 0 < b, c < 1.

Increasing returns to scale (IRS) means F(aK, aL) > aF(K, L)

F(aK, aL) =A(aK)b (aL)c

=Aab ac Kb Lc

=a b+c AKb Lc

=ab+c F(K, L)

If b + c > 1, then F(aK, aL) > aF(K, L)