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short run cost.doc

14 Pages

Course Code
MGMT 650
Sebastien Breau

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Principles of Economics Shortrun CostWe first examine the cost of firms in the period when capital is fixed to understand the importance of marginal cost in the determination of profit maximizing outputWe do this by deriving cost functions from production functions SHORTRUN PRODUCTION AND COST FUNCTIONSProduction Function Definition The set of all maximum possible outputs from a given input or inputs that provide a technologically feasible way to produce a commodity or serviceQfXo X X X XXwhere Xirepresents the inputs into production1234NWe simplify this by dividing the inputs into Capital K and Labour L to getQfL KFirmDefinition A business organization producing goods and services from resource inputsBusiness implies the assumption of profit maximization The firm connects costs and output as the smallest unit of productionIndustryDefinition All the firms that produce a given good or serviceShortrunDefinition The period in which one factor input is fixedLongrunDefinition The period in which all factors are variableVariable InputsDefinition Inputs that vary in quantity with each additional unit of output 1 Principles of Economics Shortrun Cost Variable inputs include Labour Fuel and Raw Materials but we use Labour L to represent them allFixed InputsDefinition Inputs that do not vary in quantity with an additional unit of outputFixed inputs include equipment and machinery buildings and land but we use Capital K to represent them allSHORTRUN PRODUCTION FUNCTIONSTotal Product of Labour TPLDefinition The total output produced from each total labour output given fixed capital TPqfLK LQoutput of the industry and qoutput of a firm so that Qnq where nfirms in the industryAverage Product of Labour AP or simply AP since we will assume that capital is fixed LDefinition Average output of each labour unit given fixed capitalAPqLLMarginal Product of Labour MP or simply MPLDefinition The change in output due to a change in labour given fixed capitalMPDqDL qqLL for discrete changes L1010ordqdL for infinitesimal changes in LabourNOTE The Marginal Product of Labour is often expressed as the change in output due to an additional unit of labour 2
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