Relationship between MPLand MC:If labor is the variable input being paid a fixed wage
(w), MC and MPLare inverses of each other. MC =w/(DQ/DL) =w/MPL.
Relationship between APLand AVC:In the simplified case where labor is the variable
input being paid a fixed wage (w), AVC and APLare inverses of each other. AVC =w/(Q/L)
=w/APL.
Economies of scale:The downward part of the LRAC curve where LRAC falls as plant size
increases. This is the result of specialization, lower cost of inputs, or other efficiencies from
larger scale.
Constant returns to scale:Occurs when LRAC is constant over a variety of plant sizes.
Diseconomies of scale:The upward part of the LRAC curve where LRAC rises as plant size
increases. This is usually the result of the increased difficulty of managing larger firms,
which results in lost efficiency and rising per unit costs.
The Firm, Profit, and the Costs of Production ‹ 115