Lecture%206 - Econ 208 lecture 6 Lecture 6 Understanding...

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Econ 208 lecture 6 Lecture 6: Understanding Production and Supply Note: Office hours MW: 1:30 to 2:30. Quiz up on WebCT. 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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Econ 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.
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