Class Notes (834,026)
Canada (508,290)
Economics (1,614)
ECON 2X03 (55)
Lecture

# Lecture 1.docx

4 Pages
198 Views

School
Department
Economics
Course
ECON 2X03
Professor
James Bruce
Semester
Winter

Description
Lecture 1 Inputs (factors or factors of production): things firms use to make their output Input bundle: a list of quantities, one for each input a firm can use Production function: the maximum output a firm can produce as a function of input bundles - y = output - z = input - So a production function ex: y = f(z ,z ) 1 2 Assume firms behave in such a way to maximize profits (difference between revenue and cost of production) Given that revenue depends on output, profit maximization, requires that the given level of output be produced at a minimum cost The firm’s cost minimization problem: min w z w z subject to F(z z ) > y’ where: 1 1 + 2 2 1 2 - w1 = cost per unit of input 1 - w2 = cost per unit of output 2 Opportunity cost (economic cost or cost): the opportunity cost of something is the value he value of the resources used to obtain it in their best alternative --- Ex: you tie up \$1000000 of your savings in your factory for a year. The return this money could have earned elsewhere (bond) is part of the opportunity cost of the factory. - Short run: one input is fixed, the other is variable - Long run: both inputs are variable - Suppose z is fixed in SR (z ) 2 2 - Y = F(z 1z 2 = TP(z 1, TP = total product Marginal product: rate of change of output as one input increases (holding the other constant) - MP1 = dF(z ,z1)/2z 1 - MP2 = dF(z ,z1)/2z 2 - MP = dTP(z )/d1 1 - Free disposal: firms can costlessly throw away inputs. By assuming free disposal, we get that: o MP >= 0 Diminishing MP: as the quantity of an input gets large, its MP approaches zero Average Product (AP): AP = TP/z 1 Average-Marginal Relationships: - Margin > Average: Average increasing - Margin = Average: Average constant - Margin < Average: Average decreasing - dAP/dz = 1TP*z /dz 1 TP 1 - dAP/dz = 1/z (MP1AP) Cost Stuff In the short run, the cost-minimizing quantity of the variable input is found by inverting the TP - z1*=TP (y) Variable Cost (VC): cost arising from variable input - VC = w z1 1 Fixed Cost (FC): costs arising from the fixed input - FV = w z 2 2 Short-run total costs (STC) - STC = VC + FC Short-run marginal costs (SMC): rate of change of costs as output changes - SMC = dVC/dy = dSTC/dy because there is no change in fixed cost Average Variable Cost (AVC) - AVC = VC/y Short-run Average Cost (SAC) - SAC = STC/y Average Fixed Cost (AFC) - AFC = FC/y Note: SAC = AVC + AFC and that the average-marginal relationship holds for: - SMC and AVC - SMC and SAC VC = w z
More Less

Related notes for ECON 2X03
Me

Log In

OR

Join OneClass

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

Sign up

Join to view

OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.

Request Course
Submit