Invisible Hand and Market Equilibrium Article Example | Topics and Well Written Essays - 500 words - 1

Invisible Hand and Market Equilibrium - Article Example The reason why some long-run average cost curves are steeper on the downside is due to economies of scale. Larger firms try to maximize production output, so the curve would be more positive and steeper than normal. The average fixed cost curve would fall as a larger firm could produce more output. Overall, this would reduce the average fixed cost per unit. The reason why some long-run average cost curves are steeper on the downside is due to economies of scale. Larger firms try to maximize production output, so the curve would be more positive and steeper than normal. The average fixed cost curve would fall as a larger firm could produce more output. Overall, this would reduce the average fixed cost per unit. 5. Explain the relationship between average fixed cost and marginal cost. Marginal cost is the cost to produce one more item, while the average fixed cost is the total cost divided by total production. These two are linked because marginal cost decreases as the average fixed cost also decrease. This is because fixed cost remains the same no matter the production output, so producing more units reduces the average fixed cost overall. Marginal cost also decreases because while the variable cost would go up, the total fixed and variable cost would be divided by more units, thus reducing marginal cost.  Ã‚   6. Explain why a firm's shut-down decision does not incorporate the fixed costs of the production facility. A firm usually chooses to shut down when revenues do not cover the variable costs associated with production. Fixed costs are not considered because they have to be paid regardless of whether the firm is producing anything or not. Just because a firm chooses to shut down does not mean that they will go out of business; they are just temporarily suspending production. If and when the firm decides to resume production, all of the fixed costs will carry on as normal. Because the marginal cost increases, some industries have upward-sloping long-run supply curves even they do not experience diminishing marginal returns. The law of diminishing marginal returns says that for each new worker that is introduced to the workplace, their overall output will be less than the employees already working there. Because a firm can only produce so much, if there are too many workers then this decreases the average output of each worker. Due to economies of scale, some firms that are monopolies can incr ease the supply of labor and will lessen total output in the long term. As a result, the supply curve slopes upward.