204_summer_2009_lecture_9

204_summer_2009_lecture_9 - University of Toronto...

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University of Toronto Department of Economics ECO 204 Summer 2009 Sayed Ajaz Hussain Lecture 9 1 Ajaz Hussain. Department of Economics
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Last Time ± Optimized Cost Function ² Sensitivity analysis ± (Long run) cost function analysis ² Choice of Technology ² AC ² Returns to scale ² A closer look at U shaped (long run) AC ² Functional form of the cost function ² linear vs. non linear ² Modeling technological progress ² Learning by doing Ajaz Hussain. Department of Economics 2
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Today ± Short run production function ² Fixed, variable, quasi fixed (or quasi variable) inputs ± Optimal choice of inputs in “short” run ² CMP ² Demands & sensitivity analysis ² A comparison with ECO 100 ² Short run cost function & sensitivity analysis ² TFC, TVC, AC, AVC, and MC ± Minimum Efficient Scale ± Economies of scope ± P K when capital owned: “user cost of capital” Ajaz Hussain. Department of Economics 3
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Long vs. Short Run Production Functions Ajaz Hussain. Department of Economics 4 Long run production function ± All inputs are variable ± Q = f(Variable Inputs) Short run production function ± At least one input fixed ± Some inputs variable ± Q = f(Fixed and variable inputs) Production function Output = f(Inputs)
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Fixed & Variable Inputs: Simplistic Treatment ± Economics tends to categorize inputs as either fixed or variable ± Convenient for “dual” interpretation between inputs and costs and vice versa “Duality” Ajaz Hussain. Department of Economics 5 Fixed inputs Fixed Costs Variable inputs Variable Costs
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Example: Robert Mondavi Ajaz Hussain. Department of Economics 6 Net Revenue COGS Gross Profit SG & A Other Dep. & Amort Q1 FY02 80,903 42,816 38,087 23,138 8,933 5,603 Figures in ‘000s of $. Duality Fixed inputs correspond to fixed costs and vice versa Economics: TFC Accounting: SG & A, R&D, depreciation & amortization Variable inputs correspond to variable costs and vice versa Economics: TVC Accounting: COGS
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Fixed vs. Variable Inputs: Examples ± Denote fixed inputs by Non capital letters ² Variable inputs are CAPITALIZED ± In the following, examine duality: ² “Textbook” business: ² Q = f(k, L) ² Law firm: ² Q = f(K, l ) ² General Motors ² Q = f(k, l ) ² Why is bankruptcy “good” for GM? Ajaz Hussain. Department of Economics 7 Where will cost of inputs appear in an economist’s financials? Accountants financials? Can we deduce the nature of an input from type of cost?
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Quasi Variable (or Quasi Fixed) Inputs ± The practice of labeling inputs as either fixed or variable implies: ² Fixed inputs Fixed costs ² Variable inputs Variable costs ± In reality, inputs can be fixed and variable ² Known as “quasi variable” (or “quasi fixed”) Ajaz Hussain. Department of Economics 8 Time Cost ($)
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Why do Quasi Variable Inputs Matter?
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This note was uploaded on 05/02/2011 for the course ECO 204 taught by Professor Hussein during the Fall '08 term at University of Toronto- Toronto.

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204_summer_2009_lecture_9 - University of Toronto...

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