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ajaz_204_2009_lecture_12

# ajaz_204_2009_lecture_12 - University of Toronto Department...

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University of Toronto Department of Economics ECO 204 2009 2010 Sayed Ajaz Hussain Lecture 12 1 Ajaz Hussain. Department of Economics. University of Toronto (St. George)

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Today ± Short Run CMP ² Fixed Inputs and Fixed Cost ² Average Fixed Cost ² Variable Inputs and Variable Cost ² Average Variable Cost ² Increasing, Constant and Decreasing returns ² Total Cost ² Average Cost ± Cobb Douglas Short Run CMP ± The Prestige Telephone Company Case Ajaz Hussain. Department of Economics. University of Toronto (St. George) 2
(N = 2) CMP: Long vs. Short Run Ajaz Hussain. Department of Economics. University of Toronto (St. George) 3 Production Function q = f(Input 1 , Input 2 ) Target output q Price Taker Choose optimal Input 1 , Input 2 Producer Problem for 2 Variable Inputs (Long Run) Production Function q = f(Input 1 , Fixed Input 2 ) Target output q Price Taker Choose Input 1 Producer Problem for 1 Variable Input and 1 Fixed Input (Short Run)

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Long vs. Short Run Long Run Production Function Q = A f(L, K) Long Run Cost C = P L L + P K K Short Run Production Function Q = a f(L, k ) Short Run Cost C = P L L + P K k Ajaz Hussain. Department of Economics. University of Toronto (St. George) 4
Common Production Functions L ONG R UN (“F LEXIBLE ”) Cobb Douglas Q = A L α K β Perfect Substitutes Q = A ( α L + β K) Complements Q = A min( α L , β K) Quasi Linear Q = A (L + f(K)) Ajaz Hussain. Department of Economics. University of Toronto (St. George) 5 S HORT R UN (“I NFLEXIBLE ”) Cobb Douglas Q = a L α k β Perfect Substitutes Q = a ( α L + β k ) Complements Q = a min( α L , β k ) Quasi Linear Q = a (L + f( k )) Assume Labor is variable input

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Short Run Production: Returns Suppose company doubles all variable inputs What is impact on output? Look at Returns Increasing returns: Doubling variable inputs more than doubles output Constant returns: Doubling variable inputs doubles output Decreasing returns: Doubling variable inputs less than doubles output Ajaz Hussain. Department of Economics. University of Toronto (St. George) 6 Do NOT confuse with “returns to scale”
Example: How to Check Returns Cobb Douglas Production Function Initial Q = a L α k β Increasing Returns when Output with double variable inputs > Double initial output a (2L) α k β = a 2 α L α k β > 2 a L α k β 2 α > 2 Increasing returns when: α > 1 Constant Returns? Decreasing Returns? Ajaz Hussain. Department of Economics. University of Toronto (St. George) 7

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Returns and AVC C = TFC + TVC AC = C/Q = TFC/Q + TVC/Q = AFC + AVC If all variable inputs double, TVC always doubles Ajaz Hussain. Department of Economics. University of Toronto (St. George) 8 Q AFC Q AVC Returns Q AVC Constant Returns Q AVC Returns
Returns: Output and Cost Ajaz Hussain. Department of Economics. University of Toronto (St. George)

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ajaz_204_2009_lecture_12 - University of Toronto Department...

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