ECON 208 Lecture Notes - Lecture 7: Longrun
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ECON 208 Full Course Notes
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In the long run, all inputs are variable. Firms strive for both technical efficiency and economic efficiency. For any level of output, maximizing profits requires firms to choose their inputs to minimize total costs. Using k and l to represent capital and labour, and pl and pk as the prices for the two factors, cost is minimized when: The principle of substitution: firms adjust the quantities of factors in response to changing relative factor prices. The last dollar spent in k adds 4 units to output. The last dollar spent in l adds 10 units to output. In this case, the firm can reduce the cost of producing its current level of output by using more l and less k. Methods of production will change if the relative prices of factors change. Relatively more of the cheaper factor and relatively less of the more expensive factor will be used. Methods of producing the same product often differ across countries.