e100_winter2010_lecture8_topost

e100_winter2010_lecture8_topost - Firm decision-making...

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Firm decision-making • Assume that firms seek to maximize profits • Profits = revenues – costs • Costs are defined as the value of all inputs used to produce output • Assume firm cannot control P, or price of inputs )) , ( ( ) , ( ) ( K L F C K L PF Q C PQ
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• Want to distinguish time-period over which firm’s decisions are made • Short-run: some inputs are fixed (can not be altered) Ex: Existing factory (fixed), workers, machines, metal can be altered
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• Long-run—All inputs can be varied • Ex: In long-run, firm can decide to alter output by building additional factories, opening new plants, stores, etc.
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Firm decisions in the short run (simplify to just 1 input) • Assume 1 fixed factor (capital) & 1 variable factor (labor) • Firm must choose output level • Output level will determine both revenues (how many items supplied) and costs (value of inputs used in production)
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Production Function • Relates quantities of inputs to quantities of outputs • PF is a summary of the firm’s technology— how are inputs physically transformed into final product • Q = F(L,K)
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Examples of production function • Q = LK 2 • Q = 5L + 2K • Q = 5ln(L) + 3ln(K)
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Assume 1 fixed, 1 variable input • Firm has fixed level of capital, can choose amount of labor to use • Total product (TP) = total amount produced per time period , TP(L) = F(L,K) • Average product (AP) = F(L,K)/L (Amount produced per unit of labor)
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• Marginal Product (MP) = change in total output resulting from one additional unit of labor (variable factor) • MP = derivative of the production function with respect to input dL K L F d L TP )) , ( (
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TP L TP AP L AP L 1
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TP L TP AP L AP L 1 Slope = AP (at L 1 )
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e100_winter2010_lecture8_topost - Firm decision-making...

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