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University of Toronto St. George

ECO100Y1b.doc Lecture #9 Monday, November 10, 2003 T HEORY O F T HE F IRM Firms want to maximize profits. Input Firm Output q = q(K,L ). (Production Function) Time Periods Very short run: both factors fixed. q = q(K, L) p S q Short run: one factor fixed. q = qK, L) Long run: two inputs vary. q = qK, L) Very long run: technology varies the q = qK, L) function itself varies. Relate to Costs of Production TC q )= pKK + p LL . In the short run, SR= p KK + p LL = Total FixedCost +Total VariableCost = TFC+TVC . Short Run Productivity Curves q = q(K, L= TotalProduct of Labour . SR AP AP = MP where AP is maximum. L When AP is rising, MP is above it. MP L When AP is falling, MP is below it. AP MP L Page 1 of 14 ECO100Y1b.doc Lecture #10 Monday, November 17, 2003 TPL= qK, L) TP TP AP = L TP MP = L TP L AP MP MP AP L C OST CURVES TC = P K + P L =TFC +TVC SR K L Example TC = $5001+$100L MC AC MC SAC L U-shaped cost curves Law of Diminishing (Marginal) Return MC TFC AC SAC AFC = q MC AFC TVC AVC AVC = q TC SR= TFC +TVC SAC = AFC + AVC q q q q Page 2 of 14
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