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
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)
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)
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 )) , ( (
Total & Average Product TP L TP AP L AP L 1

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Total & Average Product TP L TP AP L AP L 1 Slope = AP (at L 1 )
Relationships between TP, MP, AP

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