Ch 10 - Output and costs - Ch 10 Output and costs Olivier...

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Ch. 10: Ch. 10: Output and costs Output and costs Olivier Giovannoni ECO304K: Introduction to Microeconomics
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Outline Outline In the previous chapter we saw that the firm’s objective is to maximize profits. Yet profits depends on both the production undertaken by, and the costs faced by, the company. This chapter introduces both sides, insisting on the cost structure that a company faces. We distinguish between many types of costs and represent them (graphs!). We deal with the distinction between short run an long run costs. We work through the same numerical example as in the textbook. 1. Introduction 2. The product side 3. Short run costs 1. Example and calculations 2. Relationship with the product side 3. Influence of technology and the price of the factors of production 4. Long run costs Ch.10 – Output and costs – 2
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1. Introduction 1. Introduction The study of the behavior of the firm is a central aspect of microeconomics . Why? Some decisions are critical to the survival of the firm, Some decisions are irreversible (or very costly to reverse) The economic goal of companies is to maximize: economic profit = total product – total costs equivalently, to minimize: total cost per unit. However this objective can be arrived at in different ways depending on the time frame. There are two aspects that are important here: Costs in the short run Costs in the long run Ch.10 – Output and costs – 3
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1. Introduction (…) 1. Introduction (…) Long run costs: in the long run, all factors of production (labor, capital, land) are flexible (read: adjustable). The long run decisions are not easily reversed or are costly to reverse. Short run costs: in the short run one (or more) resources are fixed. Typically capital and land are given in the short run, so that costs can only be changed through an adjustment of the quantity of labor . Short run decisions are easily reversed. Now, for costs as well as for the level of production we have to distinguish between: Total product and total cost Marginal product and marginal cost Average product and average cost Ch.10 – Output and costs – 4
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1. Introduction (…) 1. Introduction (…) The definitions are the following: The Total product ( TP ) is the total output produced in a given period. The marginal product ( MP ) of labor is the change in total product that results from a one-unit increase in the quantity of labor employed, ceteris paribus (There are marginal products for each factor of production). The average product ( AP ) of labor is equal to total product divided by the quantity of labor employed. The formulas are the following: Ch.10 – Output and costs – 5 side) product (on the , L TP AP L TP MP = = side) cost (on the , Q TC AC Q TC MC = =
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2. Product side Say that at different points in time (A, B, C, D, E) the firm is employing a different number of employees (one more each time in this example).
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