Lecture 06 - ECO100

# Lecture 06 - ECO100 - ECO ECO 100Y Introduction to...

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ECO 100Y Introduction to Economics Lecture 6: Production and Cost in e Long e Long- un the Long the Long Run Run © Gustavo Indart Slide 1

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ong ong- un Conditions Long Long Run Conditions Run Conditions ± All factors of production are variable ± Firms can substitute one factor for another ± Firms will choose a technically efficient combination of K and L ± Production function considers combinations ± There are several combination of K and L to produce any given level of output © Gustavo Indart Slide 2
rofit Maximization Profit Maximization ± irms try to maximize profits Firms try to maximize profits ± rofit- aximization implies Profit maximization implies costminimization ± Method of production must be economically p y efficient (and not only technically efficient ) © Gustavo Indart Slide 3

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Economically Efficient Combinations of K and L hen the last dollar spent on d creases total ± When the last dollar spent on K and L increases total output by the same amount MP K MP L ± = P K P L MP L P L ± = P MP K P K © Gustavo Indart Slide 4
actor Substitution Factor Substitution ± Suppose that at certain combination of K and L the following relationship holds: MP K MP L > P K P L h t h ld b d t hi i ffi i ? ± What should be done to achieve economic efficiency? nce, beyond the point of diminishing marginal productivity, the Since, beyond the point of diminishing marginal productivity, the marginal product of a factor of production decreases as more of that factor is being used in production, increasing the quantity of K will reduce MP K and decreasing the quantity of L will increase © Gustavo Indart Slide 5 MP L . Therefore, the firm should substitute capital for labour.

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Isoquants ± Different combinations of K and L can produce a given output in a technically efficient way y ± For instance, let’s say that Q = 5 can be produced with either (K, L) = (5, 3) or (K, L) = (4, 4) ± We obtain this information from the production function ¾ Q = F(K, L) ¾ For Q = 5 , then 5 = F(K, L) will indicate all the different combinations of K and L that will produce 5 units of utput op ± An isoquant is the locus of all the combinations of K and L that can produced a given level of © Gustavo Indart Slide 6 output
An Isoquant (Q = 5) q( Q 5 ) K L 12 10 1 8 10 ay 72 6 f Capital/d a 53 2 4 Units o 44 5 0 12345 i fLb / d © Gustavo Indart Slide 7 3.5 5 Units of Labour/day

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onditions for an oquant Conditions for an Conditions for an Isoquant Isoquant ± In the general case, isoquants satisfy three important conditions: K ¾ They are downward- sloping ¾ They are convex to e origin Q 1 the origin ¾ They cannot intersect L © Gustavo Indart Slide 8
An Isoquant Map K The farther away an isoquant curve is from the origin, the greater the level of output it represents.

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## This note was uploaded on 08/10/2011 for the course ECON 100 taught by Professor Carr during the Spring '10 term at University of Toronto.

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Lecture 06 - ECO100 - ECO ECO 100Y Introduction to...

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