By David F. Heathfield
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Among other things , this means that the firm is 44 An Introduction to Cost and Production Functions small compared with the size of the total market for the product, and that it cannot influence market price by changing its output. If the firm charges a price below that of the market, it can sell all it can produce. If, on the other hand, the firm charges a price above that of the market, it will discover that its sales are zero . Thus, thefirmfaces a horizontal demand curve in perfect competition.
The importance of this distinction, between extensive and intensive margins, derives from the effect they have on rent. Rent is the reward paid to landowners and occurs in classical theory from the fact that land at the extensive margin yields less than land within the margin. Thus those who own land within the margin can charge 'rent' equal to the excess production per acre of their land over that at the margin. If land in the valley yields 10 tons of wheat per acre per man and ifland on the hillside yields 5 tons of wheat per acre per man then the valley land attracts rent to the value of 5 tons of wheat.
8) which is the cost function . HP(Pl> P 2 ). All cost functions are homogeneous of degree 1 in the input prices, that is doubling all prices leads to a doubling of total costs. This is natural since a doubling of all (in this case both) prices does not alter the slope of the isocosts and does not change the cost-minimising input combination at a specific isoquant. With VI , V2 unchanged and a doubling of PI' P 2, it is obvious that TC = PIVI + P2V2 must double. 8) refers to total costs. 9) Since all factors are variable in the long run, we have an identity between total and variable cost.
An Introduction to Cost and Production Functions by David F. Heathfield