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Lecture_Note_Set_7_Firm's_Technologies_&_Costs

Lecture_Note_Set_7_Firm's_Technologies_&_Costs -...

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Chapter 7 Firms’ Technologies, Production Costs and Supply Decisions Preparation. The topics discussed in this note are: Firm’s technology. Firm’s production function. Fixed inputs. Variable inputs. Marginal product of labor. Total product of labor. Law of Diminishing Returns. Marginal cost of production. Wage rate. Profit-maximization. Marginal revenue. Firm’s supply decision. Producer’s Surplus. Fixed input cost. 135
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136 CHAPTER 7. TECHNOLOGIES, COSTS AND SUPPLY Variable input cost. Total input cost. Consult the index of your textbook and review what your book has to say about these topics before coming to class. Motivation. You have already encountered market supply curves. You have dis- covered that supply curves are part of the explanation of how market prices are determined and how market prices change. You have also seen how a market-clearing price ensures that trade takes place between the buyers who are the most willing to pay for a commodity and the sellers who are the most willing to supply the com- modity. We will see later that this has very important implications for maximizing the gains-from-trade to buyers and sellers. But before this can be done we need to develop a deeper understanding of both market supply and market demand curves. These are separate tasks. In this chapter we will figure out how firms decide what quantities to supply. This will allow us to discover from whence come market supply curves. We already know that, by definition, a market supply curve for a commodity displays the total quantity of the commodity that is supplied to the market for each possible given value for the commodity’s price. We also know that this total quantity supplied is the sum of all of the quantities supplied by each of the individual firms in the market. Therefore, to understand from where a market supply curve comes we must determine how each individual firm chooses the quantity it will supply in response to a given market price for its product. In effect we need to figure out a supply curve for each individual firm and then add together all of these individual firms’ supply curves to construct the market supply curve. Discovering an individual firm’s supply curve involves two steps. The first of these is to figure out how the quantity of output produced by a firm depends upon the quantities of inputs used by the firm. We call the relationship between the quantity produced and the quantities of inputs used the firm’s TECHNOLOGY . Once we know a firm’s technology and the prices that it must pay for its inputs we can proceed to the second step, which is to figure out what it costs the firm to produce its output.
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