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Econ301_week4 - Econ 301 Intermediate Microeconomics Week 4...

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Econ 301 Intermediate Microeconomics Week 4, Jul 6-Jul 9 Jingbo Cui (ISU) Econ 301-Summer 2010 Week 4, Jul 6-Jul 9 1 / 56 Outline 1 Firms and Production Production Short-Run Production Long-Run Production Returns to Scale 2 Costs Measuring Costs Short-Run Cost Long-Run Cost Lower Costs in the Long Run 3 Experiment 2 - Production Cost Jingbo Cui (ISU) Econ 301-Summer 2010 Week 4, Jul 6-Jul 9 2 / 56
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Firms and Production Firm’s Decision 1 A decision must be made as to how a firm is owned and managed. i.e. a corporation run by professional manager; 2 The firm must decide how to produce. i.e. more machines and less workers; 3 If a firm wants to expand output, it must decide how to do so in both the short run and the long run. i.e. in the short run, extend the workweek to six or seven days and using extra materials; in the long run, install more machines, hire more worker, and build a new plant; 4 Given its ability to change its output level, a firm must determine how large to grow. i.e. determine investment based on its belief about demand and cost in the future. Jingbo Cui (ISU) Econ 301-Summer 2010 Week 4, Jul 6-Jul 9 3 / 56 Firms and Production Production Firm’s Objective Firms take inputs and transform them into outputs Example 1 McDonalds uses potatoes, oil, fryers, buildings, and labor to produce french fries which they sell. Example 2 A hair salon uses scissors, razors, and labor to provide hair cuts (a service). Economists assume that a firm’s owners try to maximize profit : π = R - C where R = pq is firm’s revenue, C is its cost. Jingbo Cui (ISU) Econ 301-Summer 2010 Week 4, Jul 6-Jul 9 4 / 56
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Firms and Production Production Production I A firm uses a technology or production process to transform inputs or factors of production into outputs . Capital services (K): use of long-lived inputs such as land, buildings (factories, stores), and equipment (machines, trucks); Labor services (L): work performed by managers, skilled workers (architects, economists, engineers, accountants), and less-skilled workers (assembly-line workers); Materials (M): raw goods (oil, water) and processed products (paper, steel) that are typically consumed in making, or incorporated, in the final product. Jingbo Cui (ISU) Econ 301-Summer 2010 Week 4, Jul 6-Jul 9 5 / 56 Firms and Production Production Production II The various ways that a firm can transform inputs into output are summarized in the production function : the relationship between the quantities of inputs used and the maximum quantity of output that can be produced, given current knowledge about technology and organization. q = f ( L , K ) where: L : units of labor services, such as managers, skilled workers, and less-skilled workers; K : units of capital services, such as land, buildings and equipment; q : units of output. Jingbo Cui (ISU) Econ 301-Summer 2010 Week 4, Jul 6-Jul 9 6 / 56
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Firms and Production Production Short Run vs. Long Run We often distinguish between the ”short run” and ”long run” when we talk about production in economics.
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