lecture9 - technology - slides

lecture9 - technology - slides - 2/3/2009 Topic 5:...

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2/3/2009 1 Topic 5: Production (1) USC Marshal Production technology Production decisions • Having analyzed how consumers make their consumption decisions, which shed light on demand curves, we can now look at how firms make their production decisions, which will shed light on supply USC Marshal • The methodology and the toolkit are practically the same, with some additions Production decisions Three steps: – Technology and production (chapter 7) • How do we think about production and how do we measure productivity/efficiency – Cost minimization (chapter 8) USC Marshal • How to figure out the cheapest way to produce a given level of output • “utility maximization” – Profit maximization (chapter 9) • Given the cost-minimizing way of producing any level of output, which level of output should the firm actually produce
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2/3/2009 2 Production decisions • In practice, firms are complex entities, composed of individuals of varying skill, knowledge and agendas, together with the machinery, equipment, land and other inputs used to produce the final outputs. USC Marshal • To simplify the setting, we assume that: – The goal of the firm is to maximize profits – Output is produced using two factors of production : • Capital, K • Labor, L Production technology Example: Assembling garden benches – Noah and Naomi want to start assembling garden benches from pre-cut bench “kits” – They have a 1,000-square foot garage – Assembly involves three steps. Assembling the USC Marshal back is hardest, assembling the frame and and attaching the back section are easier. – How will the amount of labor translate into output? • Depends on the choice of production meth Production technology • Two workers can: – (B) work alone, each producing 33 per week – (C) cooperate on back, do rest alone, joint 70/week – (D) cooperate on back, specialize, joint 74/week Production Number of Garden Efficient? USC Marshal method workers benches per week A13 3 Y e s B26 6 N o C2 7 0 N o D2 7 4 Y e s
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2/3/2009 3 Production technology • Four workers can: – (E) Replicate D – two specialized teams. Unfortunately the space starts getting crowded, output 125/week – (F) Full specialization (2 back, 1 frame, 1 assembly), 132/week Production Number of Garden Efficient? USC Marshal Production method Number of workers Garden benches per week A13 3 Y e s B26 6 N o C2 7 0 N o D2 7 4 Y e s E 4 125 No F 4 132 Yes Production technology Choice of production method: – In practice, there are many ways of converting a given amount of inputs (K,L) into a final product (output) – Choice of efficient technology is a major challenge USC Marshal to firms – This solution is given by a production function, which tells for any (K,L) employed the maximum amount of output that can be produced Q F K , L Production technology
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This note was uploaded on 04/07/2009 for the course BUAD 351 taught by Professor Eastin during the Spring '07 term at USC.

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lecture9 - technology - slides - 2/3/2009 Topic 5:...

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