econ111_lecture6_7 - Econ 111 Microeconomics Spring 2009...

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1 Econ 111 Microeconomics Spring 2009 Lecture 6 Heiwai Tang
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2 Agenda Review new concepts in Chapter 6 MRTS Returns to scale Chapter 7 Different types of costs: economic, accounting fixed, sunk, variable, total, average, marginal Relationship between average cost (AC) and marginal cost (MC) Isocost Lines The concept of cost minimization
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3 Review: MRTS Marginal rate of technical substitution (MRTS) Amount by which the quantity of one input can be reduced when one extra unit of another input is used, so that output remains constant . ) of level fixed a for ( q L K MRTS Input Labor in Change Input Capital in Change MRTS Δ Δ = =
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4 Review: MRTS (cont’) We assume there is diminishing MRTS (a direct consequence of diminishing marginal products) e.g. Increasing labor in one unit increments from 1 to 5 results in a decreasing MRTS from 1 to 1/2 Productivity of any one input is limited Diminishing MRTS occurs because of diminishing returns. Diminishing MRTS is associated with convex isoquants. (like diminishing MRS and convex indifference curves)
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5 Review: The relationship between MRTS and the two marginal products of inputs MRTS L K/ ) K q/ L)/( q/ 0 K ) K q/ ( L L) q/ ( q L) F(K, q = Δ Δ = Δ Δ Δ Δ = Δ Δ Δ + Δ Δ Δ = Δ = ( : g rearrangin Recall that movement along the isoquant implies no change on output. Thus:
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6 Review: Two special cases of production function Two extreme cases show the possible range of input substitution in production 1. Inputs are perfect substitutes MRTS is constant at all points on isoquant 2. Fixed-Proportions Production Function (Inputs are perfect complements) MRTS is 0, infinity, or undefined There is no substitution available between inputs The output can be made with only a specific proportion of capital and labor
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7 Review: Increasing returns to scale Increasing returns to scale : output more than doubles when all inputs are doubled Larger output associated with lower cost (cars) One large firm is more efficient than many (utilities) The isoquants get closer together when output increases.
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8 Review: Constant returns to scale Constant returns to scale : output doubles when all inputs are doubled Plant size does not affect productivity May have a large number of producers Isoquants are equidistant apart
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9 Review: Decreasing returns to scale Decreasing returns to scale : output less than doubles when all inputs are doubled Decreasing efficiency with large size Reduction of entrepreneurial or management abilities Isoquants become farther apart Bureaucracy, coordination and information problems with large size (Citibank? Costs of diversification?)
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econ111_lecture6_7 - Econ 111 Microeconomics Spring 2009...

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