Lecture5 ECO100 - Introduction to Introduction to Economics Economics Lecture 5 Production and Costs in the Short-Run Short Gustavo Indart Slide 1

Info iconThis preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
ECO 100Y troduction to Introduction to conomics Economics Lecture 5: d ti d C t Production and Costs in the Short in the Short-Run Run © Gustavo Indart Slide 1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
he 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: hat to produce and in what quantities ¾ what to produce and in what quantities ¾ what technology to use hat quantities of each factor of production to use ¾ what quantities of each factor of production to use © Gustavo Indart Slide 2
Background image of page 2
roduction Theory Production Theory ± In production theory, the underlying behavioural assumption is that firms try to maximize profits e the difference between the value of sales (or ± 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 © Gustavo Indart Slide 3
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
easurements 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 pp y ± For convenience, when analyzing the cost of the firm, we are going to talk about the dollar equivalent of opportunity cost © Gustavo Indart Slide 4
Background image of page 4
Different Time Periods ± The short run is a time period in which technology and e quantities of some factors of production are fixed the quantities of some factors of production are fixed ± The long run is a time period in which all inputs may e varied but in which the basic technology of 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 i d di th i d t i ti © Gustavo Indart Slide 5 ¾ It varies depending on the industry in question
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
The Production Function ± In any of the periods just considered, the firm tries to roduce an mbining the different 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 mbination 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 ) © Gustavo Indart Slide 6 ¾ e.g., Q = 2L + 3K or Q = 5 L ½ + K ½
Background image of page 6
The Short The Short-Run Production Run Production 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 ) herefore the level of output ( changes only as ¾ Therefore, the level of output ( Q ) changes only as L varies ± In the short run, the production function describes how the maximum attainable output varies as the antity of ries © Gustavo Indart Slide 7 quantity of L varies
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 01/19/2010 for the course ECONOMICS ECO100 taught by Professor J.l.carr during the Fall '08 term at University of Toronto- Toronto.

Page1 / 36

Lecture5 ECO100 - Introduction to Introduction to Economics Economics Lecture 5 Production and Costs in the Short-Run Short Gustavo Indart Slide 1

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online