Section 03 _Firms Part I_

# Section 03 _Firms Part I_ - Firms Part I (Section 3) What...

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1 Firms Part I (Section 3) What are firms? Why should people (consumers, “firms”) always do an action up until MB=MC? Equimarginal principle- if something is worth doing at all it should be done at the point where MB=MC I. Technology Production Function - Maximum output you get for a given input A. Graph one input case: This notes may not be distributed or copied without the permission of David Welsch

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2 B. Two inputs For now we will have labor (L) and capital (K) be our two inputs (later we may switch to X and Y) 1. Definitions Short Run (in production)- A time horizon during which at least one of the firm’s inputs cannot be changed (usually capital, K) Long Run (in production)- A time horizon long enough to vary all of its inputs Fixed Inputs - cannot change within a given time frame (usually capital, K) Variable Inputs - can change within any time frame (usually labor, L) Types of costs : Total Fixed Costs (TFC)- Cost of all inputs that are fixed in short run. Average Fixed Costs (AFC)- Produced Output of Quantity Costs Fixed Total Total Variable Cost (TVC)- Cost of all variable inputs used in producing a particular level of output Average variable cost (AVC)- Output cost Variable Total Marginal Cost -
3 Total Product - The output from a given combination of inputs Marginal product - The additional output produced when 1 more input is used (or a small change in the input) Marginal product of Labor - Marginal product of Capital - Law of diminishing (marginal) returns - As more and more of any input is added to a fixed amount of other inputs, its marginal product will eventually decline Intuition ? Average Product - used input of units of Number (output) Product Total Long run total cost (LRTC)- cost of producing each quantity when all inputs (costs) can be changed (even fixed input costs, usually K) Long run average total costs (LRATC) = Q LRTC Economies of scale : Economies of scale - Long run average total costs decrease as output increases Constant returns to scale - Long run average total cost is unchanged as output increases Diseconomies of scale - LRATC increases as output increases Sunk cost - A cost that was incurred in the past and does not change in response to present decisions.

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4 2. Equations Spse a firm’s production function is: ( ) K L f q , = Marginal product of labor - L L K f L q MP L = = ) , ( Average product of labor - L q AP L =
3. Graphs Why does AP L rise and then fall? Why does MP

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## This note was uploaded on 12/27/2011 for the course ECON 302 taught by Professor Ahmad,y during the Fall '08 term at Wisc Whitewater.

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Section 03 _Firms Part I_ - Firms Part I (Section 3) What...

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