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Long Run Production Model Essay Plan
- Module
- Principles Of Microeconomics
- Institution
- Loughborough University (LU)
Bullet Point Plan on how to structure an essay on the Long-Run production model
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Introduction:- Define the Long Run (LR): Time period where all factors of production are variable hence
firms can choose and substitute between both capital and labour and
- What are Isoquants: curves joining combinations of labour and capital which produce the
same level of output
- What are Isocosts: line which connects all combinations of labour and capital that cost the
same
Main Body:
- Profit maximising firms will want to choose the combination of labour and capital which is
the least costly option; why?
- Production in the long run can give increasing or decreasing returns to scale
- Costs in the long run can be affected by economies or diseconomies of scale
- Analyse the assumptions of the LR model of production:
1. Factor prices fixed: changes in these cause shifts to curve
2. Tech and factor quality: changes in these cause shifts of curve
3. Firms are efficient; choose least costly mix of capital and labour
- What do each of the above assumptions affect on the LRAC curve and the LR model?
- How realistic are these assumptions in terms of holding in the real world?
- Analyse the different parts of the LRAC curve and show the returns to scale/economies of
scale on the various parts of the curve
- What do each of these mean i.e. the returns to scale and economies of scale
- How do these economies/diseconomies of scale arise?
- How is the LRAC related to the SRAC curves
- Why are Isoquants shaped the way they are?: shaped like indifference curves as many of the
axioms can apply to them
- Why are Isocosts shaped the way they are? Link back to assumptions of LR Model and the
equation of an isocost and explain reason behind this equation; relate to real world
examples
- Shut down rule in the LR: Why is it different to the SR shutdown rule?
- Where should the firm produce to maximise profit if it doesn’t shutdown: at MR=MC
Conclusion:
- Answer question e.g. why should the firm produce this output? Why is the LR Model as it is
but how is this limited in real life i.e. which assumptions aren’t realistic?
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