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lecture%208 - Econ 208 lecture 8 page 1 Review of...

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Econ 208 lecture 8 page 1 Review of Determination of the level of output 1. The marginal cost curve is the supply curve for the individual firm. This is determined by the profit-maximizing condition that output be set at a level that makes marginal cost equal to marginal revenue. Under perfect competition marginal revenue equals price for a price-taking firm. 2. Since the marginal cost curve is w/MP for any input, it follows that a rise in input prices (w) shifts marginal cost up (or to the left), and a fall in input prices shifts it down. A rise in the marginal product due to technological change also shifts MC down. A rise in MP can also come about through increase in quantity of complementary inputs. We will turn to choice of technique shortly Firm comparative statics. Industry level: sum of individual MC’s. Note that if there are extgernal effects this relation is more complicated. Will decide later whether to discuss this point or not. Comparative Statics Change in capital stock or resource base Change in technology Change in input prices. These all affect MC and thus the supply curve. Examples:
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Econ 208 lecture 8 page 2 Choice of Technique We now turn to a more complicated queston. How does the price system guide firm’s decisions with respect to methods of production? There are normally more than one way to produce something – more than one way to skin a cat, so to speak. The way economists analyze choice of technique is in terms of input combinations. We speak of labour-intensive or capital- intensive or land-intensive techniques. But the general principle applies to any number of specific inputs.
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lecture%208 - Econ 208 lecture 8 page 1 Review of...

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