Week5.ProductionandCosts.2009

# Week5.ProductionandCosts.2009 - ECMA04H Week 5 We will...

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ECMA04H Week 5 We will finish up Elasticity and Excess Burden of an Excise Tax and then move on to… Production, Productivity and Costs Production, productivity and costs Basic objective….understand diminishing marginal productivity and the shapes of typical cost curves in short run. Why?: to understand the supply curve. Decisions by firms about how much to produce/supply.

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We assume that the objective of firms is to maximize profits! They hire labour and purchase (or rent) capital equipment and other inputs. These inputs combine together to produce output. Output is sold to earn a profit (or loss…. )
A simple story to motivate what this week is all about: Imagine that you and 4 other friends are in a lawn mowing business. You have only one lawnmower (fixed amount of capital). The following is the “production function” 1 workers + 1 lawnmower = 5 lawns per day 2 workers + 1 lawnmower = 9 lawns per day 3 workers + 1 lawnmower = 12 lawns per day 4 workers + 1 lawnmower = 14 lawns per day 5 workers + 1 lawnmower = 15 lawns per day The “marginal product of labour” (additional output from the additional worker) is 5 lawns for the first worker, 4 more for the second, 3 more for the third, 2 more for the fourth, and 1 more for the final worker

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The “average product of labour” is 5 lawns per worker when there is 1 worker, 4.5 lawns per worker when there are 2 workers, 4 lawns per worker when there are 3 workers, 3.5 lawns per worker when there are 4 workers, and 3 lawns per worker when there are 5 workers
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Week5.ProductionandCosts.2009 - ECMA04H Week 5 We will...

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