61159 - Chapter 9 Production & Cost in the Short Run...

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9.1 Chapter 9 – Production & Cost in the Short Run Our focus has been on the fact that firm’s attempt to maximize profits. However, so far we have only focused on the revenue side of profits and have ignored costs. Increased globalization of markets has forced firm’s to focus more on productivity and control of costs in order to compete in the international market place.
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9.2 Short Run versus Long Run In the short run at least one input is fixed in quantity and cannot be changed. In the long run all inputs are variable. Thus, even plant size can be changed (capital decisions). Short run costs will depend on short run production theory and long run costs on long run production theory.
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9.3 Production Functions A production function is a relationship(table, graph, or equation) showing the maximum output that can be produced from any specified set of inputs, given the state of technology. Our production function to allow for graphical efficiency is of the following form: Q = f(L,K)
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Technical Efficiency versus Economic Efficiency Technical efficiency is achieved when output is maximized for any combination of inputs. Thus, any point on the production function is technically efficient. Economic efficiency is achieved when a given level of output is generated at least cost. Note a process may be technically efficient and not economically efficient. Example – building airfields in SE Asia during
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61159 - Chapter 9 Production & Cost in the Short Run...

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