BA_315_LN_5_SUPPLY_DECISIONS

BA_315_LN_5_SUPPLY_DECISIONS - SUPPLY DECISIONS Lecture...

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1 SUPPLY DECISIONS Lecture Notes #5 BA 315: Economy, Industry, and Competitive Analysis Source: Schiller Chapter 5 Edited by Ali Emami Department of Finance Charles H. Lundquist College of Business University of Oregon
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2 Introduction This lecture focuses on the costs of production and how they affect the supply of a product or service. The first part of the lecture explains differences between short-run and long-run production highlighting the differences between ”fixed” and ”variable” inputs. The second part shows how dollar costs are related to the use of resource (inputs). This lecture attempts to provide answers to the following questions: 1. What limits a firm’s ability to produce? 2. What costs are incurred in producing a good? 3. How do costs change when output changes? Concepts you will learn Supply Fixed cost Normal profit Factors of production Variable cost Average fixed cost Production function Explicit cost Average variable cost Marginal physical product (MPP) Accounting cost average total cost (ATC) Law of diminishing returns Economic cost marginal cost (MC) Short-run Accounting profit production decision Long-run Economic profit investment decision
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3 Lecture Outline I. Supply f Definition : Supply - The ability and willingness to sell (produce) specific quantities of a good at alternative prices in a given time period, ceteris paribus . II. Capacity Constraints: The Production Function A. Factors of Production f Definition: Factors of Production - Resource inputs used to produce goods and services. e.g., land, labor, capital, and entrepreneurship. B. Production Function (Table 5.1) f Definition: Production Function - A technological relationship expressing the maximum quantity of a good attainable from different combinations of factor inputs. 1. Purpose Production Functions tell us just how much output we can produce with varying amounts of factor inputs. 2. The output of any factor of production depends on the amount of other resources available to it. Labor Input 0 1 2 3 4 5 6 7 8 Capital Input Output 0 0 0 0 0 0 0 0 0 0 1 0 15 34 44 48 50 51 51 47 2 0 20 46 64 72 78 81 82 80 A Production Function
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4 C. Efficiency - The maximum possible output produced with a given number of workers. (Figure 5.1) ±D.± Capacity – Refers to how much output can be produced with a given amount of inputs. a. Land and capital constraints place a ceiling on the potential output. b. To produce at capacity, a firm needs to use its inputs efficiently. E. Marginal Physical Product (MPP) f Definition : Marginal Physical Product (MPP) - The change in total output associated with one additional unit of input. 1. f Formula : Quantity Input in Change Output Total in Change (MPP) product physical marginal = 2. A worker’s productivity (MPP) depends in part on the amount of other resources in the production process. Note:
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This note was uploaded on 04/22/2008 for the course ECON 315 taught by Professor Aliemami during the Spring '08 term at University of Oregon.

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BA_315_LN_5_SUPPLY_DECISIONS - SUPPLY DECISIONS Lecture...

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