ajaz_eco204_2009_chapter_4.1 - University of Toronto...

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University of Toronto, Department of Economics, ECO 204 2009 2010 S. Ajaz Hussain ECO 204 2009 2010 S. Ajaz Hussain (Draft) Chapter 4.1: Technology, Production Set, Long Run Production Function 1 Please help improve the course by sending me an e mail about typos or suggestions for improvements Introduction 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 not 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 cost minimizing 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 choice 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 1 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. 1 ECO 204 (Draft) Chapter 4.1
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University of Toronto, Department of Economics, ECO 204 2009 2010 S. Ajaz Hussain efficiently was through capital intensive technology. In the mid 90s, a Chinese company BYD reversed engineered batteries and figured out a more efficient, labor intensive, manufacturing process. Today, BYD is the dominant manufacturer of batteries (with Warren Buffet as an investor ). As another example, should a firm use capital and labor as imperfect substitutes or as complements? If a firm chooses inputs as complements (say 2 workers paired with 1 machine) then it’s using a fixed proportions technology. In contrast, if inputs are used as imperfect substitutes, then it’s using a variable proportions technology. For example, to produce a cup of “black” coffee,
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ajaz_eco204_2009_chapter_4.1 - University of Toronto...

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