eco200_producer&costtheory_fall2009

eco200_producer&costtheory_fall2009 - ECO 200:...

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ECO 200: Microeconomic Theory Lecture notes on f rm production and costs 1 Fall 2009 Carlos J. Serrano 1 Lecture notes updated on Nov. 3, 2009 at 11.21pm 1
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Summary Firm production Production with one and several inputs Production functions Firm costs Long run costs, cost minimization and inputs demand Short run costs cost minimization and inputs demand Minimum cost functions 2
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1 Production In this section we will study the production function of a f rm or how inputs are transformed into output. We will analyze isocuants, the marginal rate of technical transformation, some basic properties of production functions. What is a f rm? For simplicity, we will assume it is a technology. 2 A technology trans- forms inputs into output (e.g. a production function). Inputs might be labor (workers), capital (machines), ideas (patents), intermediate goods, etc. For simplicity, we will con- sider Labor ( ) and capital ( )asinputs . F ina lgoodsw i l l be considered as output ( ), and the function that transform inputs into output, (   ) is the production function. = (   ) To put the production in context, a f rm acquire inputs such as and to produce some units of output Inputs are costly, when markets are competitive, we can de f ne the price of labor and capital as and .T h e f rm can buy any number of units at these prices. We can de f ne the cost of a f rm as =  +  We will start focusing on the production of f nal goods . Once we have studied produc- tion, then we will cover the the cost structure of a f rm. 1.1 Production Function Aproduct ionfunct ionortechno logy = (  ) provides the highest level of production given inputs and . An example might be (   )=  KLF ( K , L ) 111 224 Other examples are Leontie f (or perfect complements) ( min { } ,Cobb - Douglas ( 0 5 0 5 and perfect substitutes (   + ,etc 2 Note that a f rm is generally something more complex including an organizational structure, supervi- sors, workers, tangible capital, intangible capital, reputation,etc. 3
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Figure 1: 1.1.1 Short and long run Not all inputs in a production function might be f exible. We will refer to short run a period of time in which the quantities of one or more factors cannot be changed. Unless I say the contrary, I will assume that is f exible in the short run, but is not. The long run is the amount of time needed to make all inputs variables. Example 1 General Motors For General Motors it takes time to build a factory (e.g., capital), but hiring new workers (labor) is relatively faster. In this case, capital will be a f xed input in the short run, and labor would be a F exible. In the long run, General Motors f nd equally F exible to change the level of workers and machines 1.1.2 Production with one variable input (e.g., Labor) Assume that capital F xed, but labor is the variable input. We can de F ne the following two concepts.
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This note was uploaded on 04/10/2010 for the course ECO ECO200 taught by Professor Carlosserrano during the Spring '10 term at University of Toronto- Toronto.

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eco200_producer&costtheory_fall2009 - ECO 200:...

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