Lecture 05 - ECO100

Lecture 05 - ECO100 - ECO 100Y ECO 100Y Introduction to...

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ECO 100Y troduction to Introduction to conomics Economics Lecture 5: d ti d C t Production and Costs in the Short in the Short-Run Run © Gustavo Indart Slide 1
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he Firm The Firm ± A firm is an institution that buys or hires factors of production and organizes these resources to produce and sell goods and services ± The most important decisions a firm has to make are: ¾ what to produce and in what quantities ¾ what technology to use ¾ what quantities of each factor of production to use © Gustavo Indart Slide 2
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Production Theory ± In production theory, the underlying behavioural assumption is that firms try to maximize profits ± Profits are the difference between the value of sales (or Total Revenue ) and the Total Cost of producing the output sold ¾ π = TR – TC ¾ TR = P*Q he firm’s equal to the value of all the ± The firm s is equal to the value of all the inputs used in the production of the output l i © Gustavo Indart Slide 3 ± Profit-maximization implies cost-minimization
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easurements of Costs Measurements of Costs ± Accountants measure historical cost, where historical cost values factors of production at the price actually paid for them ± Economists measure opportunity cost, where the best alternative forgone opportunity cost is the best alternative forgone ± For convenience, when analyzing the cost of the firm, cv c , w y g c s , we are going to talk about the dollar equivalent of opportunity cost © Gustavo Indart Slide 4
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Different Time Periods ± The short run is a time period in which technology and the quantities of some factors of production are fixed ± The long run is a time period in which all inputs may be varied but in which the basic technology of production cannot be changed he the period of time in which all ± The very long run is the period of time in which all inputs and technologies may be varied ote that time eriods do not correspond to any ± Note that time-periods do not correspond to any specific number of months or years is a conceptual distinction and it varies depending © Gustavo Indart Slide 5 ¾ It is a conceptual distinction and it varies depending on the industry in question
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The Production Function ± In any of the periods just considered, the firm tries to produce an output combining the different inputs in the most efficient way ± The production function shows the maximum output that can be produced with any input combination ¾ It only shows technically efficient combinations of pt inputs ± For instance, the production function Q = F(L, K) shows the maximum output ( Q ) that can be produced with any combination of labour ( L ) and capital ( K ) © Gustavo Indart Slide 6 ¾ e.g., Q = 2L + 3K or Q = 5 L ½ + K ½
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The Short The Short-Run Production Run Production Function ± For simplicity, we will assume that there are only two factors of production: capital ( K ) and labour ( L ) ± In the short run , K is assumed to be fixed ( K ) herefore the level of output ( changes only as ¾ Therefore, the level of output ( Q ) changes only as L varies ±
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Lecture 05 - ECO100 - ECO 100Y ECO 100Y Introduction to...

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