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Comm220 Ch 6.pdf

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Concordia University
COMM 220

CHAPTER 6PRODUCTIONKey Concepts and TopicsThe Technology of ProductionProduction with One Variable Input Labor IsoquantsProduction with Two Variable InputsReturns to Scale IntroductionTheory of the firm Explains how a firm makes costminimizing production decisions and how its costs vary with outputCosts of production change with changes in both input prices and level of outputProduction Decisions of a FirmProduction decisions of a firm can be broken down into three steps 1 Production Technology 2 Cost Constraints 3 Input Choices Production TechnologyDescribe how inputs can be transformed into outputsInputsland labor capital and raw materialsOutputscars desks books etcFirms can produce different amounts of outputs using different combinations of inputs Cost ConstraintsFirms must consider prices of labor capital and other inputsFirms want to minimize total production costs partly determined by input pricesFirms must be concerned about costs of production Input ChoicesGiven input prices and production technology the firm must choose how much of each input to use in producing output thSource Pindyck and Rubinfeld 2009 Microeconomics 7 Ed Pearson Prentice Hall Chapter 6 1Given prices of different inputs the firm may choose different combinations of inputs to minimize costsIf labor is cheap may choose to produce with more labor and less capital If a firms costs of production are at its minimization we can studyHow total costs of production varies with outputHow does the firm choose the quantity to maximize its profits We can represent the firms production technology in the form of a production function The Technology of ProductionProduction FunctionDescribes the maximum output q that a firm can produce for every specified combination of inputs at a given state of technologyFor simplicity we will consider only labor L and capital K Shows what is technically feasible when the firm operates efficiently The production function for two inputs qFKLOutput q is a function of capital K and labor LBoth inputs and output are flowsThe production function is true for a given technologyIf technology increases more output can be produced for a given level of inputs Short Run versus Long RunIt takes time for a firm to adjust production from one set of inputs to anotherFirms must consider not only what inputs can be varied but over what period of time that can occurWe must distinguish between long run and short runShort run and long run are not time specific Short RunPeriod of time in which at least one of the inputs is fixedFor example when K is fixed firms vary the intensity with which they utilize a given plant and machinery LongrunAmount of time needed to make all production inputs variablethSource Pindyck and Rubinfeld 2009 Microeconomics 7 Ed Pearson Prentice Hall Chapter 6 2
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