ECON 310 Lecture 5: l310x5

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California State University - Long Beach
ECON 310
E Funkhouser

Lecture 5 The Production Function and the Costs of the Firm I. Introduction We now turn to looking at the underlying determinants of the supply curve. In the same way that the consumer maximizes utility subject to the budget constraint, the firm maximizes profits subject to its technology and the prices it faces in the market. The tools for thinking about this are the production function and the isocost curves. The firm takes inputs and, given its technology, uses those inputs to produce outputs. These inputs might include: Labor (L) Machines (K) Raw Materials (R) Buildings (B) Management Skills (M) We can write this as: Q = F (L, K, R, B, M) II. One factor of production Labor A. Production Function A simple place to start is to look at the relationship between output (Q) and one factor of production (L), holding the other factors fixed at a constant level. Then, we have: Q = F (L; K, R, B, M) = F(L) holding other things fixed We might have something that looks like: Workers Output Average Marginal (Total Product of Product of Product) Labor Labor 0 0 1 10 10 10 2 19 8.5 9 3 27 9 8 4 34 8.5 7 5 40 8 6 6 45 7.5 5 7 49 7 4 8 52 6.5 3 9 54 6 2 10 55 5.5 1
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