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Lecture 12

ECO101H1 Lecture 12: Production and Cost

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Production and Costs in Short Run There are both fixed and variable factors of production The MP (marginal product) of the variable fact ventually diminish Law of diminishing returns The MC of producing additional un ventually increases ATC schedule is an upward facing parabola Firms Long Run ATC Schedule In short run, GM hires more workers to increase output In long run, GM builds more assembly pla nd hires more workers Law of diminishing returns does not apply Suppose firm doubles all inputs: Output doubles (constant returns to scale) ATC unchanged Horizontal straight line graph Output less than doubles (diseconomies of scale) ATC increases Upward sloping line graph Output more than doubles (economies of scale) ATC falls Downward sloping line graph Short run Has fixed factor of production ATC is upward facing parabola (U shaped) Long run ATC does not necessarily have to be upward facing parabola Digression: Why is ATC schedule U shaped in short run (fixed factor of production)? ATC = AFC + AVC AFC = TFC Q falls as Q increases AVC = TVC Q rises as Q increases since MC rises as Q increases Example: Economies of scale Specialization Diseconomies of scale Organization and Coordination In long run, GM can vary assembly plants (capital) and workers (labour) Both fixed and variable factors of production Suppose GM decides in long run to produce 100,000 cars year GM could have: 4 plants and 15,000 workers 3 plants and 18,000 workers Efficient production assumes GM will use combination of plants and workers where 100,000 cars can be produced at lowest average total cost (ATC)
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