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Summary notes 2


Department
Economics
Course Code
ECO100Y1
Professor
W.G.Wolfson

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ECO100Y1b.doc
Page 1 of 14
Lecture #9 Monday, November 10, 2003
THEORY OF THE FIRM
Firms want to maximize profits.
(
)
LKqq ,=.
Time Periods
Very short run: both factors fixed.
(
)
LKqq ,=
Short run: one factor fixed.
(
)
LKqq ,=
Long run: two inputs vary.
(
)
LKqq ,=
Very long run: technology varies the
function itself varies.
(
)
LKqq ,
ˆ
=
Relate to Costs of Production
(
)
LpKpqTCLK+=.
In the short run, TVCTFCCost Variable TotalCost Fixed Total+=+=+=LpKpTCLKSR.
Short Run Productivity Curves
(
)
Labour ofProduct Total,== LKqq
SR
.
MP
AP
=
where AP is maximum.
When AP is rising, MP is above it.
When AP is falling, MP is below it.
L
APL
MPL
AP
MP
q
p
S
Firm Output
Input
(Production Function)
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ECO100Y1b.doc
Page 2 of 14
Lecture #10 Monday, November 17, 2003
(
)
LKqTP
L
,=
L
TP
AP =
L
TP
MP
=
COST CURVES
TVCTFCLPKPTC
LKSR
+=+=
Example
LTC100$1500$ +×=
U-shaped cost curves Law of Diminishing (Marginal) Return
q
TFC
AFC=
q
TVC
AVC=
AVCAFCSAC
q
TVC
q
TFC
q
TCSR+=+=
SAC
MC
AC
MC
AVC
AFC
q
TP
AP
MP
L
L
AP
MP
TP
SAC
MC
AC
MC
L
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ECO100Y1b.doc
Page 3 of 14
PROFITS
TCTR
=
π
Nature of Costs: Accounting Costs vs. Economic Costs
Manager’s salary
TR = $500000
TC = $450000 including $25000 manager’s salary.
Profits = $50000
Adjust: $25000
Economic π: $25000
Interest imputation adjustment
Adjust $10000
Economic π: $15000
TCTR
=
π
TC where every input paid its opportunity cost
0
=
π
business making its proper return (normal rate of return)
0
>
π
attractive, should go into business
0
<
π
economic loss
PROFIT MAXIMIZATION
Produce or Not? Loss Minimization
QTVCTRProfits
0-$ -$ 100.00-$
1 2.00$ 10.00$ 92.00-$
2 4.00$ 20.00$ 84.00-$
3 6.00$ 30.00$ 76.00-$
As you produce more, you reduce the loss
produce positive quantity.
QTVCTRProfits
0-$ -$ 100.00-$
1 20.00$ 10.00$ 110.00-$
2 40.00$ 20.00$ 120.00-$
3 60.00$ 30.00$ 130.00-$
As you produce more, you increase the loss
produce nothing.
Produce when TVCTR
>
.
Rule #1: Produce when AVCp
q
TVC
q
TR>>.
Profit Maximizing Quantity
Rule #2: For πmax, MCMR
=
INDUSTRY STRUCTURES
Monopoly: one firm Duopoly: two firms Oligopoly Monopolistic Competition Perfect Competition:
large number of firms
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