Class Notes (806,766)
ECON 208 (190)
Lecture

Chapter 8.pdf

3 Pages
111 Views

School
McGill University
Department
Economics (Arts)
Course
ECON 208
Professor
Mayssun El- Attar Vilalta
Semester
Fall

Description
Chapter 8 Producers in the long-run Long-run: no ﬁxed factors - all factors can be varied - numerous ways to produce any given output - ﬁrms in the long-run must choose the type/amount of plant/equipment/labor force - producers aim to be technically efﬁ cient (inputs are combined to maximize output) - technical efﬁciency isn't enough for proﬁt maximization - the ﬁrm must choose from the many technically efﬁcient options and pick the one that produces a given level of output at the lowest cost - choices about how much capital and labor to use are long-run choices because all factors are assumed to be variable Proﬁt maximization and cost minimization - cost minimization = ﬁrms choose the production method that produces a given level of output at the lowest possible cost - long-run cost minimization: - if its possible to substitute one factor for another to keep output constant/reduce total cost the ﬁ rm is not minimizing its costs - the ﬁrm should substitute one factor for another factor as long as the marginal product of one factor is greater than the marginal product of another factor - i.e. if more \$ spent on labor produces more output than more \$ spent on capital would, the ﬁ rm can reduce costs by spending more on labor and reducing expenditure on capital - MP of capital/price of one unit of capital = MP of labor/price of one unit of labor - when they are not equal there are possibilities for factor substitutions that will reduce costs - but will the law of diminishing returns - new cost-minimizing condition: MP of capital/MP of labor = price of one unit of capital/price of one unit of labor - new condition compares contribution to output of the last unit of capital and the last unit of labor - the right side shows how the cost of an additional unit of capital compares to the cost of an additional unit of labor - if the two sides are the same then the ﬁrm can't make any substitutions between labor/capital to reduce costs - if the ratio on the right side < left side then the ﬁrm should switch to a production method that uses less labor and more capital - only when the ratio of MPs is exactly = to the ratio of factor prices is when the ﬁrm is using the cost- minimizing production method Principle of substitution - methods of production will change if relative prices of inputs change, with relatively more of the cheaper input and relatively less of the more expensive input being used - this principle plays a central role in resource allocation - it relates to the way ﬁrms respond to changes in relative factor prices that are caused by the changing scarcities of factors in the economy - ﬁrms are motivated to use less factors that become scarce and more factors that are plentiful in the economy i.e. banks: price of labor has gone up, price of atm equipment has gone down, now employ more capital than labor Long-run cost curves - LRAC: shows lowest possible cost of producing each level of output when all inputs can be varied - with given factor prices there is a minimum achievable cost for each level of output - if cost is in \$ per unit of output, we get the LRAC of producing - LRAC = U shape, part before the mi
More Less

Related notes for ECON 208

OR

Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Join to view

OR

By registering, I agree to the Terms and Privacy Policies
Just a few more details

So we can recommend you notes for your school.