Week 3B

Week 3B - COMM/FRE 295 September 23, 2010 Production...

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Unformatted text preview: COMM/FRE 295 September 23, 2010 Production Readings/Homework Sections 5.1 5.5 of the text Fortunately the theory of production has many similarities with the theory of the consumer Assignment 1 will be posted on Friday, Sept 24 (you will have just short of two weeks to complete it) Start on it soon it is long and challenging! Topics Examined Production function and its properties Short-run: marginal and Average product Law of diminishing returns Production in the long run Substitution among inputs (isoquants) Returns to scale Overview of Production Understanding the economics of production is key for understanding cost Understanding cost is key to achieving maximum profits in short/long run Many important management questions: how should quantity supplied respond to changes in output and input prices? how much labour should be used? When should labour be replaced with capital? should production take place in several plants or in one central location? how do sunk costs affect my production decision? Production Choice Scenario You manage student copy shop You currently hire three part students to help with the collating, sorting, etc. You can lease a high end machine for an extra $2500 month that will reduce your labour requirements to two part time students What factors will affect your decision? In the 1970s predicted that computers would generate lots of idle time for people. Is that true? Production Function Firms can use inputs in various combinations Production function is like a blue print; it captures the technical relationship between inputs and output To simply our analysis, we will work with a two-input production function Q = F(L, K) e.g., Q = 6L 0.5 K 0.5 (Q = production, L = labour, K = capital) Changes in technology or improvements in labour productivity are captured by changes in the production function e.g. changing from Q = 6L 0.5 K 0.5 to Q = 8L 0.6 K 0.4 Examples Identify industries which are capital intensive in some countries and labour intensive in other countries Identify industries for which it is not possible to...
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Week 3B - COMM/FRE 295 September 23, 2010 Production...

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