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ECE1010.04.post

# ECE1010.04.post - UNIT II 10/8 FIRMS MARKETS Theory of the...

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UNIT II: FIRMS & MARKETS Theory of the Firm Profit Maximization Perfect Competition Review 11/5 MIDTERM 10/8

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Theory of the Firm Today we will build a model of the firm, based on the model of the consumer we developed in UNIT I. Where consumers attempt to maximize utility, firms attempt to maximize profit. We saw how changes in prices affect consumers’ optimal decisions and derived a demand function: P = f(Qd). Now we will see how changes in prices affect firms’ profit maximizing decisions and derive a supply curve : P = f(Qs). Later, we will put supply and demand together, and begin our analysis of markets and market structures .
Theory of the Firm The Good News! In moving from the consumer to the firm, we replace the troublesome notion of utility with something nice and hard-edged: profit . Where utility is subjective and thus hard to measure, now we’ll be talking about simple, measurable quantities, physical units of inputs (tons of steel, hours of labor) and outputs, and an account for everything in dollars and cents (“the bottom line”).

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Theory of the Firm The Technology of Production Short-run v. Long-run Isoquants Returns to Scale Cost Curves Cost Minimization Profit Maximization
Theory of the Firm First, we need to write down our model: Profit ( Π 29 = Total Revenue(TR) – Total Cost(TC) TR(Q) = PQ TC(Q) = rK + wL P Price L Labor Q Quantity K Capital w Wage Rate Q = f(K,L) r Rate on Capital The firm wants to maximize this difference

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Theory of the Firm First, we need to write down our model: Profit ( Π 29 = Total Revenue(TR) – Total Cost(TC) TR = PQ TC(Q) = r K + w L P Price L Labor Q Quantity K Capital w Wage Rate Q = f(K,L) r Rate on Capital Economic costs include opportunity costs Economic Π < Normal Π (accounting) If a firm earns positive profits, all factors are earning more than they could in alternative uses
Theory of the Firm First, we need to write down our model: Profit ( Π 29 = Total Revenue(TR) – Total Cost(TC) TR(Q) = PQ TC(Q) = rK + wL P Price L Labor Q Quantity K Capital w Wage Rate Q = f(K,L) r Rate on Capital INPUTS The production function describes a relationship between the quantity of physical inputs (K, L) and quantity of outputs (Q).

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Theory of the Firm First, we need to write down our model: Profit ( Π 29 = Total Revenue(TR) – Total Cost(TC) TR(Q) = PQ TC(Q) = rK + wL P Price L Labor Q Quantity K Capital w Wage Rate Q = f(K,L) r Rate on Capital OUTPUT The production function describes a relationship between the quantity of physical inputs (K, L) and quantity of output (Q).
The Technology of Production Technology: a list of all possible production plans, i.e., all the ways to transform inputs into outputs. The production function: describes a relationship between inputs and the maximum quantity of output (all inputs are used technologically efficiently).

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ECE1010.04.post - UNIT II 10/8 FIRMS MARKETS Theory of the...

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