Summary notes 2

121 views14 pages
12 Sep 2010
School
Department
Course
Professor
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)
www.notesolution.com
Unlock document

This preview shows pages 1-3 of the document.
Unlock all 14 pages and 3 million more documents.

Already have an account? Log in
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
www.notesolution.com
Unlock document

This preview shows pages 1-3 of the document.
Unlock all 14 pages and 3 million more documents.

Already have an account? Log in
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
www.notesolution.com
Unlock document

This preview shows pages 1-3 of the document.
Unlock all 14 pages and 3 million more documents.

Already have an account? Log in

Get OneClass Grade+

Unlimited access to all notes and study guides.

Grade+All Inclusive
$10 USD/m
You will be charged $120 USD upfront and auto renewed at the end of each cycle. You may cancel anytime under Payment Settings. For more information, see our Terms and Privacy.
Payments are encrypted using 256-bit SSL. Powered by Stripe.