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Lecture 13

Lecture 13-Production Function

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Department
Economics
Course
ECO101H1
Professor
Jack Carr
Semester
Fall

Description
Thursday, October 29th, 2009. Production Function )LUP¶V/RQJ-run Average Total Cost Schedule: 1. ,QVKRUWUXQ*0PXVWKLUHPRUHZRUNHUVWRLQFUHDVHRXWSXW³/DZRI'LPLQLVKLQJ5HWXUQ´DSSOLHV 2. In long run, GM can build more assembly paints as well as hire more workers 2.1 ³/DZRI'LPLQLVKLQJ5HWXUQV´GRHVnot apply 2.2 MP does not necessarily fall after some point Æ MC does not necessarily rise 3. Suppose firm doubles all inputs a) Output doubles (constant returns to scale) Æ ATC unchanged b) Output less than doubles (diseconomies of scales) Æ ATC increases c) Output more than doubles (economies of scale) Æ ATC falls Long-run Average Total Cost Curve ATC Constant Returns to Scale The property whereby long-run average total cost stays the same as the quantity of output changes Q ATC Diseconomies of Scale The property whereby long-run average total cost rises as the quantity of output increases Q www.notesolution.com Economies of Scale: Specialization (for example) Diseconomies of Scale: Organization & Co-ordination Cost Long-run Average Total Cost Curve: 1. Labour, capital both vary Æ Law of Diminishing Returns does not apply 2. In the long-run, there are no fixed costs 3. Shows lowest ATC for producing each level of output (efficient production) 4. )LUP¶V/RQJ-run ATC may at first exhibit economies of scale and later diseconomies of scale (see text Figure 13.7) Opportunity Cost and the Measurement of Economic Profit Economic Profit: Total Revenue ± Opportunity Cost Opportunity Cost Explicit: Input cost that require an outlay of money by the firm (eg. Wages paid to employees, cost of raw materials, etc.) Implicit: Input costs that do not require an outlay by the firm (eg. Opportunity FRVWRIRZQHU¶VLQYHVWHGFDSLWDOQRUPDOUDWHRISURILWRSSRUWXQLW\FRVWRIRZQHU¶VWLPH Accounting Profit: total revenue minus total explicit costs Economic Profit: total revenue minus total (explicit + implicit) costs ATC Economies of Scale The property whereby long-run average total cost falls as the quantity of output increases Q www.notesolution.com Example: An individual buys a business for $400,000. She invests $200,000 and borrows $200,000. Total Revenue: $100,000 Opportunity Cost: Explicit Wages $40,000 Raw Material $25,000 Bank Interest (at 10%) $20,000 Implicit 2SSRUWXQLW\FRVWRIRZQHU¶VIXQGV $20,000 (at 10%) Economic Profit: ($5,000) Economic Profit: negative => firm should exit in long run Accounting Profit: $15,000 => does not provide signal regarding entry/exit www.notesolution.comth Thursday, October 29 , 2009. Production Function L72843J-run Average Total Cost Schedule: 1. ,38K4797:3*2:89KL702470Z47N07894L3.70,804:95:9 ,Z41L2L3L8KL3J #09:73,55OL08 2. In long run, GM can build more assembly paints as well as hire more workers 2.1 ,Z41L2L3L8KL3J#09:738408not apply 2.2 MP does not necessarily fall after some point MC does not necessarily rise 3. Suppose firm doubles all inputs a) Output doubles (constant returns to scale) ATC unchanged b) Output lessthan doubles (diseconomies of scales) ATC increases c) Output more than doubles (economies of scale) ATC falls Long-run Average Total Cost Curve ATC
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