Lecture07 - Lecture 07 Firms and Production Perlo Chapter 6...

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Lecture 07: Firms and Production Perlo/ Chapter 6 Vladimir Petkov VUW 22 March 2010 Vladimir Petkov (VUW) Lecture 07: Firms and Production 22 March 2010 1 ± 25
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Firms and Technologies The driving force (the decision making unit) in production is the Firms identify opportunities to produce goods and services that: are valued by customers; can be produced by combining available inputs. There are three types of ±rms according to ownership / legal status. sole proprietorship : owned and run by a single individual; partnership : controlled by 2 or more people; corporation : owned by shareholders, limited liability. The way in which the ±rm uses inputs to produce output is called technology . Technology de±nes the limits of the amount of output that can be obtained from any given set of inputs. The entrepreneur seeks to maximize pro±t, π = R C , subject to the constraints implied by technology. Vladimir Petkov (VUW) Lecture 07: Firms and Production 22 March 2010 2 / 25
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Firms and Technologies (Continued) Assumptions about technology: 1 No free lunch: no output can be produced without inputs. 2 Non-reversibility: the production process cannot run in reverse (you cannot make pigs out of sausages). 3 Free disposability: if we can produce a certain output with a given bundle of inputs, it is always possible to produce less with those inputs. 4 Additivity, divisibility, and convexity (as in consumer theory). The production function gives us the outer limit of what is combination of inputs It is usually written as Q = f ( K , L ) , where Q is output and K , L are inputs (capital and labor). Vladimir Petkov (VUW) Lecture 07: Firms and Production 22 March 2010 3 / 25
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Short Run Versus Long Run The short run is a period of time so brief that at least one input The long run is a period of time during which all inputs can be varied. An input that cannot be varied in the short-run is called a input . An input that can be varied is called a variable input . variable. adjusting labor. Because of this, production is usually costlier in the short run than in the long run. Vladimir Petkov (VUW) Lecture 07: Firms and Production 22 March 2010 4 / 25
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Short Run Production: One Variable and One Fixed Input In the short run, production is given by q = f ( L , ¯ K ) , where q is output (or total product of labor), L ¯ K . q , output L , labour input Any output in this region below the production function is technically feasible, but not efficient Only output on the function is technically efficient This region is non-feasible Vladimir Petkov (VUW) Lecture 07: Firms and Production 22 March 2010 5 / 25
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Marginal and Average Products The
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Lecture07 - Lecture 07 Firms and Production Perlo Chapter 6...

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