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Firms and Production

Firms and Production. Perloff Chapter 6. Firms. An organisation that converts inputs into outputs which it sells. Ownership of the firm may be separated from its control creating a potential conflict of interest. Owners aim to maximise profits. Managers may maximise non profit objectives.

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Firms and Production

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  1. Firms and Production Perloff Chapter 6

  2. Firms • An organisation that converts inputs into outputs which it sells. • Ownership of the firm may be separated from its control creating a potential conflict of interest. • Owners aim to maximise profits. • Managers may maximise non profit objectives.

  3. Production Function The relationship between the quantities of inputs and the maximum level of output produced. Short-run: the period of time in which at least one input is fixed. Long-run: the period of time in which all inputs are variable.

  4. Total product, marginal product and average product in the SR Source: Perloff

  5. Output, q , Units per day C Production relationships in the SR 110 90 B 56 A 0 4 6 11 L , Workers per day AP , MP L L a 20 b 15 Average product, AP L Marginal product, MP L c 0 4 6 11 Source: Perloff , Workers per day L

  6. The long-run: 2 inputs variable Source: Perloff

  7. Isoquant map K , Units of capital per day Combinations of inputs which can be used to produce the same level of output. a 6 b 3 c f e 2 q = 35 d 1 q = 24 q = 14 Source: Perloff L , Workers per day 0 1 2 3 6

  8. K a 6 b 3 c f e 2 q = 35 d 1 q = 24 q = 14 L 0 1 2 3 6 Properties of Isoquants • Further from the origin:higher output • Cannot cross • Slope downward • Convex to the origin Source: Perloff

  9. Substitutability of inputs 1 y , Dutch potatoes per day q = 1 q = 2 q = 3 x , British potatoes per day Source: Perloff

  10. Substitutability of inputs 2 Boxes per day q = 3 q = 2 q = 1 45 ° line Cereal per day Source: Perloff

  11. Marginal rate of technical substitution K , Units of capital per year a 39 = – D K 18 b 21 = D L 1 – 7 c 14 1 – 4 d 10 e 1 – 2 8 q = 10 1 Source: Perloff 0 2 3 4 5 6 L , Workers per day

  12. MRTS and marginal product

  13. Constant Returns to Scale Constant returns to scale: Doubling all inputs leads to a doubling of output. Potato Salad Production:

  14. Returns to scale in the Cobb-Douglas Production Function Constant returns to scale Increasing returns to scale Decreasing returns to scale

  15. Example: Thread Mill a+b=0.82 K , Units of capital per year 600 q = 200 q = 177 500 q = 100 400 300 200 100 0 50 100 150 200 250 300 350 400 450 500 Source: Perloff L , Units of labor per year

  16. Varying Scale Economies K , Units of capital per year d 8 q = 8 c d : Decreasing returns to scale  c 4 q = 6 b 2 b c : Constant returns to scale  a 1 q = 3 q = 1 a b : Increasing returns to scale  0 1 2 4 8 L , Work hours per year Source: Perloff

  17. Technical Progress An increase in the volume of output produced with the same volume of inputs.

  18. q = 11 q = 10 Neutral technical progress K , Units of capital per year 39 21 14 10 8 Source: Perloff 0 2 3 4 5 6 L , Workers per day

  19. q = 11 q = 10 Non-neutral technical progress K , Units of Results in the substitution of one input for another. 39 21 14 10 8 Source: Perloff 0 2 3 4 5 6 L , Workers per day

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