Having covered the basics of cost analysis, we are in a position to explore other important aspects of cost efficiency. For example, will my costs fall if I produce more? As economies near perfection, costs efficiency becomes increasingly crucial, so much so that investment plays a greater role. But just how and where that investment in cost management should be directed is the subject of our second LP on cost analysis. In this LP, we’ll start where we left in our previous LP:
Short run cost analysis:
- Period analysis, where will see what determines the short and the long run.
- Short run cost analysis, as seen last week, is about dealing properly with fixed costs.
Long run cost analysis:
- Returns to scale, or how an increase on production can lower the amount of input needed for each unit of output.
- Scale elasticity, which will help us work out our ideal level of production, and then move onto
- Economies of scale, looking at how our levels of production can help us maximise cost efficiency.
- Long run cost analysis will give us an idea of how costs behave in the long run.
- Subadditivity, where we explore this concept further and introduce the idea of naturally occurring imperfect competition.
We all have a concept of what short and long run mean, but the meaning in Economics is specific and determines, for example, what we call a fixed or variable cost. Let’s look again at this definition and its importance.
