University of Toronto, Department of Economics, ECO 204 2009
2010 S. Ajaz Hussain
ECO 204 2009
S. Ajaz Hussain
Chapter 4.1: Technology, Production Set, Long Run Production Function
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Having modeled consumer behavior we now turn to modeling firm (producer) behavior such as
the firm’s objective, pricing, output, segmentation, advertising, technology and optimal inputs.
It should be stressed that ECO 204 does
model some producer issues such as organizational
structure, incentives, human resources and compensation
if interested in these topics take
ECO 310 and 370.
Our principal focus in chapter 4 will be on modeling technology, optimal choice of inputs and
deriving cost functions. Despite the seemingly narrow focus, the models in chapter 4 generate a
plethora of results vital for economic and business analysis. For example:
From a firm’s technology and input prices we can model the
levels of inputs
(labor, capital, materials, etc.) required to produce a target output, and, investigate how
inputs should be adjusted in response to changes in (say) target output, wages, capital lease
rates, opportunity cost, technological progress, etc.
We will gain insights into a firm’s
of technology where “technology” refers to the
process by which inputs are combined and transformed into output.
For example, consider battery manufacturing: until the mid 90s, the Japanese dominated
battery manufacturing by using highly automated, robotic, production manufacturing
processes. For a long time, it was taken for granted that the only way to produce batteries
Note to self: make changes in indifference curves chapters to show horizontal/vertical indifference curves as
special cases of CD, perfect subs and complements. Do a section on optimal mix of inputs in “blended” products
such as coffee, juice, textiles, etc.
ECO 204 (Draft) Chapter 4.1