Econ 281 Chapter6a - Section 3 Production and Cost Theory...

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1 Section 3 – Production and Cost Theory Thus far we have focused on the individual consumer’s decisions: Choosing consumption and leisure to: Maximize Utility Minimize Income Section 3 deals with another economic agent, the producer, and their decisions: Choose inputs, production in order to: Minimize Costs (which may maximize profits)
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2 Section 3 – Production and Cost Theory In this section we will cover: Chapter 6: Inputs and Production Functions Chapter 7: Costs and Cost Minimization Chapter 8: Cost Curves
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3 Chapter 6: Inputs and Production Functions Consumer Theory focused on choosing GOODS to generate UTILITY The firm is concerned with PROFITS and PRODUCTION In particular, the firm chooses INPUTS to produce PRODUCTION
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4 Chapter 6: Inputs and Production Functions In this chapter we will cover: Inputs and Production Marginal Returns (similar to marginal utility) Average Returns Isoquants (similar to indifference curves) Marginal rate of technical substitution (MRTS, similar to MRS) Elasticity of Substitution Special production functions (similar to special utility functions
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5 Definition:   Productive resources, such as labor and capital  equipment, that firms use to manufacture goods and  services are called  Definition:   The amount of goods and services produces by  the firm is the firm’s Definition:                      transforms a set of inputs into a set  of outputs Definition:                     determines the quantity of output that  is feasible to attain for a given set of inputs.   inputs  or  factors of production . output . Production Technology
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6 Definition :   The production function  tells us  the  maximum   possible output that can be  attained by the firm for any given quantity of  inputs.
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Econ 281 Chapter6a - Section 3 Production and Cost Theory...

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