It is known that competitive firms face long-run and short-run growth. Long-run cost is lower than the
Question:
It is known that competitive firms face long-run and short-run growth. Long-run cost is lower than the short-run cost because the firm has more flexibility in the long-run. To show the advantage of flexibility, we can compare the short-run and long-run expansion paths.
Let us assume that in the long-rub both capital (K) and labour (L) vary whereas in the short-run only labour (L) varies.
Illustrate using diagram (with labour (L) on the horizontal axis) and discuss the dynamics between the long-run expansion path and the short-run expansion path faced by a particular firm that is planning to expand, conditional upon a set of isoquants and isocosts.
Describe the following concepts:
(i) Constant Returns to Scale (CRS)
(ii) Increasing Returns to Scale (IRS)
(iii) Decreasing Returns to Scale (DRS)