Lecture6 - ECO100 - Introduction to Introduction to...

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CO 100Y ECO 100Y troduction to Introduction to conomics Economics Lecture 6: roduction and Cost in Production and Cost in the Long the Long-Run Run © Gustavo Indart Slide 1
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ong ong- un Conditions Long Long Run Conditions Run Conditions ± All factors of production are variable ± Firms can substitute one factor for another ± Firms will choose a technically efficient combination of K and L ± Production function considers technically efficient technologies ± There are several technically efficient combination of K and L to produce any given level of output © Gustavo Indart Slide 2
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rofit Maximization Profit Maximization ± Firms try to maximize profits ± Profit-maximization implies cost-minimization ± Method of production must be economically efficient nd not only technically efficient) (and not only technically efficient) © Gustavo Indart Slide 3
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Economically Efficient Combinations of K and L hen the last dollar spent on K and L increases total ± When the last dollar spent on K and L increases total output by the same amount MP K MP L ± = P K P L MP L P L ± = MP K P K © Gustavo Indart Slide 4
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actor Substitution Factor Substitution ± Suppose that at certain combination of K and L the following relationship holds: MP K MP L > P K P L ± What should be done to achieve economic efficiency? nce, beyond the point of diminishing marginal productivity, the Since, beyond the point of diminishing marginal productivity, the marginal product of a factor of production decreases as more of that factor is being used in production, increasing the quantity of K will reduce MP K and decreasing the quantity of L will increase © Gustavo Indart Slide 5 MP L . Therefore, the firm should substitute capital for labour.
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oquants Isoquants ± Different combinations of K and L can produce a given output in a technically efficient way or instance let’s say that Q = 5 can be produced with ± For instance, let s say that Q = 5 can be produced with either (K, L) = (2, 4) or (K, L) = (3, 3) ± An isoquant is the locus of all the technically efficient combinations of K and L that can produced a given vel of output level of output © Gustavo Indart Slide 6
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An Isoquant (Q = 5) q( Q 5 ) K L 12 10 1 8 10 ay 72 6 Capital/d a 53 2 4 44 5 0 12345 b /d © Gustavo Indart Slide 7 3.5 5 Labour/day
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onditions for an oquant Conditions for an Conditions for an Isoquant Isoquant ± In the general case, isoquants satisfy three important conditions: K ¾ They are downward- sloping ¾ They are convex to the origin Q 1 ¾ They cannot intersect L © Gustavo Indart Slide 8
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An Isoquant Map K The farther away an isoquant curve is from the origin, the greater the level of output it represents. If we keep L constant at L 1 while creasing the quantity of K from C K 2 increasing the quantity of K from K 1 to K 2 , then output must increase from Q 1 to Q 2 .
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