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Lecture

L12 - Production and Cost Schedules - 10212013.pdf

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Department
Economics
Course
ECO101H1
Professor
James Pesando
Semester
Fall

Description
Key question: how do firms maximize profits? First step: understand firms' cost schedules Production Function Production function: Relates output to quantity of inputs (capital, labour) Short - run : one input (capital) is fixed, while one input (labour) can vary Long - run : All inputs (capital, labour) can vary Example General Motors Short run: GM can vary amount of labour (overtime, lay-offs) GM cannot vary number of plants (capital) Long run: GM can vary number of plants and amount of labour Product Schedules (Short - Run) (TP) Total Product Total output, given labour input (MP) Marginal Product* Increase in total output divided by increase in labour input Law of Diminishing Returns: the marginal product of a variable input, in the presence of a fixed input, eventually diminishes Output Marginal Labour Average Product (Total Product) Product 0 0 1 4 4 4.00 2 10 6 5.00 3 13 3 4.33 4 15 2 3.75 5 16 1 3.20 Note: if MP is above AP, AP is rising; if MP is less than AP, AP is falling Law of Diminishing Returns: Intuition Fixed input : land (100 acres) Variable input : labour (farm workers) As number of farm workers increases, the amount of land available to each worker falls, and Marginal Product of additional farm workers eventually falls Measures of a Firm's Costs of Production Total Cost (TC): Total of all costs (TC = TFC + TVC) Total Fixed Cost (TFC): Total Cost of fixed input Total Variable Cost (TVC): Total Cost of variable input ** Marginal Cost (MC): Increase in total cost / increase in output (MC = change in TC / change in Q) ** Average Total Cost (ATC): Average cost per unit of output (ATC = TC / Q) Average Variable Cost (AVC): Average variable cost per unit of output (TVC / Q) Average Fixed Cost (AFC): Average fixed cost per unit of output (TFC / Q) Note: TFC "Sunk Costs" Wage rate: $10 Total Cost Marginal Cost Average Costs ($) ($ per unit) ($ per unit) (1)
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