Supply Side-CostSideSR

# Supply Side-CostSideSR - (2) Logic and example. By carrying...

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Supply Side-Short Run-The Cost Side Total variable costs (TVC) are the firm’s expenditure on inputs . TVC 0 = p L L + p K K. We can solve equation (8) for the amount of K the firm can purchase for this level of expenditures: (9) where TVC 0 /P K is the intercept and -P L /P K is the slope. The slope shows the ability of the firm to trade labor for capital in the market place. That is, if P L = \$2 and P K = \$1, then the firm can rent two additional units of capital if it uses one fewer units of labor. Example: TVC 0 = \$100, P L = \$2, and P K = \$1.

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Now let us combine the isocost line diagram with the isoquant diagram to examine the minimum cost combination of inputs to produce a given level of output (Q 0 ). Rules for Cost Minimization: (1) Logic and example. Note that equation (11) can be rewritten as:

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Unformatted text preview: (2) Logic and example. By carrying out the above computations for each level of output, we can derive the minimum variable costs for each level of output. The resulting relationship of TVC to Q is the total variable cost curve. What happens if the price of an input changes? (Say the price of labor falls.) Application: Allocation of Production among Multiple Plants Yet another approach. Maximize output for each level expenditures. Rearrange Equation (1) as: (3) or, maximum output, given expenditures, is obtained when the marginal product of an input per dollar spent on the input is the same. Bryan L. Boulier, 2011. All rights reserved....
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## This note was uploaded on 03/16/2011 for the course ECON 101 taught by Professor Fon during the Spring '06 term at GWU.

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Supply Side-CostSideSR - (2) Logic and example. By carrying...

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