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Econ 4010 Lecture 11

Econ 4010 Lecture 11 - 6 Production We have so...

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<Lecture 11> 6. Production We have so far focused on the demand side of the market – behaviour of consumers. Now we turn to the supply side and examine the behaviour of producers. The production decisions of firms are analogous to the purchasing decisions of consumers. 1. Preferences / Budget Constraints / Consumption Choice 2. Technology / Cost Constraints / Input Choice Technology of Production In the production process, firms turn inputs into outputs (or factors of production into products). We can describe the relationship between the inputs into the production process and the resulting output by a production function. Production Function Q = F (K, L) A production function indicates the highest output q that a firm can produce for every specified combination of inputs. Q1. What is a production function? How does a long-run production function differ from a short-run production function? A production function represents how inputs are transformed into outputs by a firm. In the short run, one or more factors of production cannot be changed. Some factors are fixed in the short run, whether the firm likes it or not, simply because it takes time to adjust the level of the variables. As time goes by, the firm has the opportunity to change the levels of all inputs. In the long-run production function, all inputs are variable. Notice that the short run is not defined as a specific number of months or years, but as that period of time where some inputs cannot be changed for some reasons. Production with One Variable Input (Labor) When capital is fixed but labor is variable, the only way the firm can produce more output is by increasing its labor input.
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