Econ 208 lecture 6
Lecture 6:
Understanding Production and Supply
Note:
Office hours MW: 1:30 to 2:30.
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Inputs and Outputs
: The Production Function
Rule 1:
You can’t get something for nothing.
This is the underlying insight of the
Production Function
Rule 2:
You can’t make money if you sell below cost.
This is the
insight of the cost and profit function.
The main problem here is
how to identify cost.
Cost and Inputs
The cost of production is the amount of inputs times the cost per
input.
Example:
Let’s imagine a simple production function, like digging
post holes.
The inputs are labourers with shovels.
Forget the
shovels for the moment, and think simply of the holes being the
product of labour.
A worker digs 10 holes per hour.
The more holes he or she digs,
the greater the number of holes.
10 hours gives 100 post holes.
Suppose the wage rate is $10 per hour.
What is the cost of a post
hole?
Simple arithmetic:
a worker digs 10 holes in an hour and costs
$10.
So the cost per hold must be $1.
This is the simple arithmetic
of cost.
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View Full DocumentEcon 208 lecture 6
Multiple inputs and Diminishing Return
Let’s bring in the space.
Suppose that we are a firm that digs holes
for its business.
Suppose we have 5 spades and that is all we can
have.
Obviously if we hire one worker, the other 4 spades go
unused.
The product of that worker is 10 holes per hour.
If we
have two workers each worker with his spade digs 10 so we get 20
holes per hour, and so on up to 5 workers, at which time
production of holes is the rate of 50 per hour.
Suppose we now hire a sixth worker.
He doesn’t have a spade of
his own, so he has to use somebody else’s spade.
But if he just
substitutes for someone else, we are back to 5 workers working
and one worker sitting on his butt.
Suppose instead that the sixth worker spells the other workers, so
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 Winter '08
 Kramer
 Biology, Economics, Microeconomics, Economics of production

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