ECO101H1 Chapter Notes - Chapter 8: Profit Maximization, Marginal Product, Technological Change
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ECO101H1 Full Course Notes
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Firms in the long run must choose the type and amount of plant and equipment and the size of their labour force (must choose between possible short-run cost curves). Technical efficiency: when a given number of inputs are combined in such a way as to maximize the level of output. In order to maximize its profit, the firm must choose from among the many technically efficient options the one that produces a given level of output at the lowest cost. Cost minimization: an implication of profit maximization that firms choose the production method that produces any given level of output at the lowest possible cost. Only when the ratio of marginal products is exactly equal to the ratio of factor prices is the firm using the cost-minimizing production method. Profit-maximizing firms adjust the quantities of factors they use to the prices of the factors given by the market.