Week 6 Lecture - ECON1001 Week 6 Production and Costs The...

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ECON1001 Week 6 Production and Costs
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2 The story so far… Gains from trade Between individuals Between countries Demand and supply determine market price and quantity with many parties Efficiency of market output Government intervention Costs and firm objectives determine supply
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3 The story so far… Demand Supply Consumer preferences and wealth Costs Firm objectives Price and quantity Government policy Market structure
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4 Topic Outline We assume firms choose an efficient mix of inputs Production functions The relationship between inputs and output Cost functions The relationship between cost and output Costs in the short run and long run
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5 Technology and Economic Efficiency Technological efficiency Occurs when it is not possible to increase output without increasing inputs The firm is using a given set of inputs efficiently Economic efficiency Occurs when the cost of producing a given output is as low as possible The firm is using a given set of inputs efficiently AND The firm chooses the most efficient mix of inputs A firm that does not use the economically efficient method of production does not maximise profit.
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6 Technological and Economic Efficiency Quantities of inputs Method Labor Capital 1 Robot production 1 1,000 2 Production line 10 10 3 Bench production 100 10 4 Hand-tool production 1,000 1 Suppose there are 4 different ways of making 10 TVs a day Technologically Inefficient
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7 Technological and Economic Efficiency (a) Four ways of making TVs Labour cost Capital cost Method ($75 per day) ($250 per day) Total cost Cost per TV set 1 $75 + $250,000 = $250,075 $25,007.50 2 750 + 2,500 = 3,250 325.00 3 7,500 + 2,500 = 10,000 1,000.00 4 75,000 + 250 = 75,250 7,525.00
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8 Technological and Economic Efficiency (b) Three ways of making TVs: High Labor Costs Labour cost Capital cost Method ($ 150 per day) ($ 1 per day) Total cost Cost per TV set 1 $150 + $1,000 = $1,150 $115.00 2 1,500 + 10 = 1,510 151.00 4 150,000 + 1 = 150,001 15,000.10
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9 (c) Three ways of making TVs: High Capital Costs Labor cost Capital cost Method ($ 1 per day) ($ 1,000 per day) Total cost Cost per TV set 1 $1 + $1,000,000 = $1,000,001 $100,000.10 2 10 + 10,000 = 10,010 1,001.00 4 1,000 + 1,000 = 2,000 200.00 Technological and Economic Efficiency
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Technological and Economic Efficiency While technological efficiency depends only on what is feasible, economic efficiency depends on the relative cost of resources. The economically efficient method uses the smallest amount of a more expensive resource a larger amount of a less expensive resource. A firm that is not economically efficient
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Week 6 Lecture - ECON1001 Week 6 Production and Costs The...

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