Lecture 05 - ECO100 - Introduction to Economics Lecture 5:...

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© Gustavo Indart Slide 1 ECO 100Y ECO 100Y Introduction to Introduction to Economics Economics Lecture 5: Lecture 5: Production and Costs Production and Costs in the Short in the Short - - Run Run
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© Gustavo Indart Slide 2 The Firm The Firm ± A firm is an institution that buys or hires factors of production and organizes these resources to produce and sell goods and services ± The most important decisions a firm has to make are: ¾ what to produce and in what quantities ¾ what technology to use ¾ what quantities of each factor of production to use
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© Gustavo Indart Slide 3 Production Theory Production Theory ± In production theory, the underlying behavioural assumption is that firms try to maximize profits ± Profits are the difference between the value of sales (or Total Revenue ) and the Total Cost of producing the output sold ¾ π = TR – TC ¾ TR = P*Q ± The firm’s is equal to the value of all the inputs used in the production of the output
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© Gustavo Indart Slide 4 Measurements of Costs Measurements of Costs ± Accountants measure historical cost, where historical cost values factors of production at the price actually paid for them ± Economists measure opportunity cost, where opportunity cost is the best alternative forgone ± For convenience, when analyzing the cost of the firm, we are going to talk about the dollar equivalent of opportunity cost
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© Gustavo Indart Slide 5 Different Time Periods Different Time Periods ± The short-run is a time period in which technology and the quantities of some factors of production are fixed ± The long-run is a time period in which all inputs may be varied but in which the basic technology of production cannot be changed ± The very long-run is the period of time in which all inputs and technologies may be varied ± Note that time-periods do not correspond to any specific number of months or years ¾ It varies depending on the industry in question
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© Gustavo Indart Slide 6 The Production Function The Production Function ± In any of the periods just considered, the firm tries to produce an output combining the different inputs in the most efficient way ± The production function shows the maximum output that can be produced with any input combination ± For instance, the production function Q = F(L, K) shows the maximum output (Q) that can be produced with any combination of labour (L) and capital (K) ¾ e.g., Q = 2L + 3K or Q = 5 L ½ + K ½
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© Gustavo Indart Slide 7 The Short The Short - - Run Production Run Production Function Function ± For simplicity, we will assume that there are only two factors of production: capital (K) and labour (L) ± In the short-run, K is assumed to be fixed (K) ¾ Therefore, the level of output changes only as L varies ± In the short-run, the production function describes how the maximum attainable output varies as the quantity of L varies
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© Gustavo Indart Slide 8 The Total Product Function The Total Product Function ± The short-run Production Function is called the Total Product Function ±
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Lecture 05 - ECO100 - Introduction to Economics Lecture 5:...

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