Chapter 6: Firms and Production (6)
(1) Ownership and Management of Firms
(2) Production
(3) Short Run Production: One variable, one fixed input STOPPED HERE LAST TIME, CONTINUE
(4) Long Run Production: Two variable inputs
(5) Returns to scale
(6) Productivity and Technical Change
Firms
Organization that converts inputs into outputs
3 sectors
Private (For profit)
Public
Non-profit (Not for profit)
Sole proprietorship: Owned by someone personally reliable for firms's debts
General partnership: Owned by multiple people personally reliable for firms's debts
Corporations: Owners are shareholders who have limited liability for firms's debts
Owners
Maximize Profits
Profit: (π)
π = profit
R = revenue
C = costs
Maximizing profits requires Efficient Production (technological efficiency)
Cannot produce current level of output with fewer inputs (no waste of resources)
Given existing knowledge about technology and how to organize production
A necessary condition, not a sufficient condition.
Use technology or production process to transform inputs or factors of production into outputs
3 types of inputs (factors of production)
Capital (K)
Labour (L)
π = R - C
Materials (M)
Production function
Relationship between quantities of inputs and maximum quantity of output that can be produced
Given current knowledge about technology and organization
Shows maximum amount of output possible (assumes efficient production)
q = f(K, L)
Variability of inputs is based on time horizon
Short run: At least one input cannot be varied
Long run: All inputs can be varied
Firm's production function in short run: q = f(L, K(bar))
Marginal product of labour (MPL): Change in total output resulting from one extra unit of labour