ECO 08 - 10 NOV - Lecture 08 ECO 100Y5Y 10 November 2008 A....

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Lecture 08 10 November 2008 ECO 100Y5Y A. Cohen 1 E C O N O M I C S PARKIN BADE Lecture 8 10 November 2008 E C O N O M I C S PARKIN BADE Chapter 10 Output and Costs Decision Time Frames Firm has two decision time frames short run — at least one fixed resource (fixed costs); other resources variable (variable costs) long run — all resources are variable (all costs variable)
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Lecture 08 10 November 2008 ECO 100Y5Y A. Cohen 2 Short-Run Technology Constraint Short-run production described by law of diminishing returns — with quantity of fixed inputs constant, as firm uses more variable input, its marginal product eventually diminishes total product curve ( TP ) — maximum output ( Q ) with fixed quantity of capital as quantity of labour varies marginal product curve ( MP ) — Δ TP from one-unit variable input Figure 10.2 Marginal Product Labour 1 2 3 4 5 Output C 4 15 10 13 D TP Labour 1 2 3 4 5 2 4 6 MP MP 3 Marginal Product and Marginal Cost Δ TP / L TC / Q L TP MP MC 0 0 ------------- 4 6.25 1 4 ------------- 6 4.17 2 10 ------------- 3 8.33 3 13 ------------- 2 12.5 4 15 ------------- 1 25.0 5 16
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Lecture 08 10 November 2008 ECO 100Y5Y A. Cohen 3 A 0 0 B 1 4 C 2 10 D 3 13 E 4 15 F 5 16 25 25 25 25 25 25 0 25 50 75 100 125 25 50 75 100 125 150 Total Total fixed variable Total cost cost cost TFC TVC TC Labour Output 6.25 4.17 8.33 12.50 25.00 Marginal cost MC 6.25 2.50 1.92 1.67 1.56 Avg. fixed cost AFC Avg. variable cost AVC 6.25 5.00 5.77 6.77 7.81 Avg. total cost ATC 12.50 7.50 7.69 8.33 9.38 Short-Run Costs (from Fig. 10.5) Short-Run Cost Short-run cost curves total cost ( TC ) = TFC + TVC total fixed cost ( TFC ) — cost of fixed inputs (includes normal profit) total variable cost ( TVC ) — cost of variable inputs marginal cost (
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ECO 08 - 10 NOV - Lecture 08 ECO 100Y5Y 10 November 2008 A....

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