Lecture 14 - Announcements MT1 grades are posted if you...

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Announcements MT1 grades are posted – if you have a zero and you took the exam, you probably put the wrong ID number – e-mail me with your ID number. MT1 and key will be posted on Scholar on Monday – please do not ask me about the exam until after you’ve gone over it yourself. Homework for ch7 due next Thursday
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THE BEHAVIOR OF PROFIT-MAXIMIZING FIRMS All firms must make three basic decisions to achieve what we assume to be their primary objective— maximum profits. The Three Decisions That All Firms Must Make 1. How much output to supply 2. Which production technology to use 3. How much of each input to demand As we will see, 2 and 3 are very closely related.
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For now, let’s ignore the “how much to make?” question and focus on the “how to make it?” questions (which technology and how much of each input to use).
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Inputs (revisited) Land – all natural resources Labor (L) – all human inputs (ex. Engineers, janitors, salespeople, etc.) Capital (K) – all the physical equipment: machines, buildings, “goods used to make other goods.” (ex. A computer is a piece of capital equipment). NOTE: This is NOT financial capital but financial capital is often used to buy it. Entrepreneurial Skill – the ability to pull all other inputs together, pay them, and then make some money out of the deal.
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THE PRODUCTION PROCESS production technology: The quantitative relationship between inputs and outputs. labor-intensive technology: Technology that relies heavily on human labor instead of capital. capital-intensive technology: Technology that relies heavily on capital instead of human labor.
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Alternative Technologies There are many ways to produce the same level of output using different combinations of capital equipment and labor. Example: There are multiple ways to get your car washed: the automated car washes (very K intensive), OR, you could get it washed by a bunch of 14-year-olds at a charity car wash (very labor intensive). Either way the car gets washed, but there are different amounts of capital and labor employed. What determines how these inputs will be used to make a particular product? Normally the relative cost of each input.
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Textbooks Example: Suppose there are 2 ways to produce 10,000 Economics Textbooks: Method 1: 1 Computerized Press, 1 operator Method 2: 100 Manual Presses, 100 Operators The job of the engineer is to provide these options to management. The engineer cannot choose which method to use…that’s management’s job. How would management decide? Management would need to examine the market-generated
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Textbooks Suppose: Operator salary = 30,000 each Lease of a computerized press = $400,000 each Lease of manual press = $10,000 each Then: Cost of method 1 = $400k+30k=$430,000 Cost of method 2 = ($30k+ $10k)*100=$4,000,000 Now management can choose a method based on costs(obviously, they’ll go with #1)
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Lecture 14 - Announcements MT1 grades are posted if you...

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