Textbook Notes (368,330)
Canada (161,803)
Economics (385)
ECO100Y5 (290)
Michael H O (131)
Chapter 8

ECO100Y5Y Chapter 8 Notes.docx

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Michael H O

Chapter 8 Notes – Producers in the Long Run - No fixed factors in long run - Profit maximizing firms try to be technically efficient; when given number of inputs are combined in such a way as to maximize level of output o Using no more of variables than necessary o Do not want to waste any inputs Profit Maximization and Cost Minimization - To maximize profits in long run should select production method that produces output at lowest cost - Cost Minimization; implication of profit maximization that firms choose production method that produces any given level of output at lowest cost o MPk/Pk = MP /PL L o Whenever ratio of marginal product of each factor to its price is not equal for all factors, there are possibilities for factor substitutions that will reduce costs (for given level of output) o MPk/MPl = Pk/Pl  Ratio of marginal products on left side compares contribution to output of last unit of capital and last unit of labour  If ratio on left side was less, it would pay firm to switch to method of production that uses less labour and more capital o When ratio is equal, most cost-minimizing method The Principle of Substitution - PoS; methods of production will change if relative prices of inputs change, with relatively more of cheaper input and relatively less of more expensive input being used - Plays role in resources allocation - Firms motivated to use less of factors that are more scarce to economy and more factors that are abundant Long Run Cost Curves - Long Run Average Cost; curve showing lowest possible cost of producing each level of output when all inputs can be varied - Determined by current technology and prices of factors of production - To move from one point to another on LRAC requires ALL factors to change Decreasing Costs - Economies of Scale; reduction of long-ru
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