Microeconomics appunti completi (microeconomia)

The Direction of Income and Substitution Effects

The substitution effect is negative for a price increase and positive for a price reduction.

If a good is normal, the income effect is negative for a price increase and positive for a price reduction; it therefore reinforces the substitution effect.

If a good is inferior, the income effect is positive for a price increase and negative for a price reduction; it therefore opposes the substitution effect.

DOWNWARD-SLOPING DEMAND CURVES

The Law of Demand states that demand curves usually slope downward.

The substitution effect is always consistent with the Law of Demand.

For a normal good, the income effect reinforces the substitution effect, so normal goods always obey the Law of Demand.

The income effect of an inferior good opposes the substitution effect.

Theoretically, if the income effect is larger than the substitution effect for an inferior good, it is called a Giffen good.

The amount purchased

could increase when the price rises, violating the Law of Demand

REVIEW! 3 - 3! {chapter 7}

Technology and production

INTRODUCTION

OBJECTIVES

• Explain how to identify a firm's efficient production methods
• Calculate average product and marginal product and explain how they measure a firm's productivity
• Discuss input substitution with two variable inputs
• Understand the concept of returns to scale and its causes
• Discuss the sources of productivity differences across firms and over time

OVERVIEW

Among all possible firms use the most efficient methods production technologies,

The simplest requires one input, but usually we encounter two or more variable production function‣ inputs

As firms grow and increase the use of all inputs, the effect on production may not be proportional‣ Returns to scale•

PRODUCTION TECHNOLOGIES

Outputs : the physical products or services a firm produces

Inputs : the materials, labor, land. ,or equipment that firms use to produce their outputs

1. Production technology: summarizes all possible methods for producing output.
2. Efficient: when there is no way for the firm to produce a larger amount of output using the same amounts of inputs.

Production Possibilities Set and Efficient Production Frontier:

• Production possibilities set: contains all combinations of inputs and outputs that are possible given the firm's technology.
• Efficient production frontier: contains the combinations of inputs and outputs that the firm can achieve using efficient production methods.

Production in the Short Run and the Long Run:

• Variable input: can be adjusted over the time period being considered.
• Fixed input: cannot be adjusted over the time period being considered.
• Short run: a period of time over which one or more inputs is fixed.
• Long run: a period of time over which all inputs are variable.

FUNCTIONS

• Production function
• Average product
• Marginal product

Production Functions:

Production function states the amount of output a firm can produce from

1. Short run: a period of time over which one or more inputs is fixed (capital fixed)
   • The marginal product of labor eventually decreases - expectation that an input's marginal product will decline as its use increases, holding all other inputs
   • The law of diminishing returns states that as successive units of a variable resource are added to a fixed resource, the marginal product of the variable input eventually diminishes, assuming all units of variable inputs-workers in this case are of equal quality
2. To increase output in the short run, a firm must increase the amount used of a variable input
3. Long run: a period of time over which

All inputs are variable:

• AVERAGE AND MARGINAL PRODUCT
• Average product of labour: the amount of output divided by the number of workers employed
• Marginal product of labour: the extra output produced due to the marginal units of labour, per unit of labour
• Law of diminishing marginal returns: states the general tendency for the marginal product of an input to eventually decline as its use is increased holding all other inputs fixed
• If the marginal worker is more productive than average, she brings the average up
• If she is less productive than average, she drives the average down
• PRODUCTION WITH TWO VARIABLE INPUTS
• Two inputs: labor (L) and capital (K)
• Production function: Q = F (L,K)
• Input substitution! - Before thinking how to maximize you need to understand labour and capital and how they work together
• How to choose which is the more efficient one?
• Less people work (cost of people > cost of space) →

with units of Y to keep output unchanged starting at a‣ given input combination! !- MTRS and Marginal Products along the same isoquant(MP x ∆L) + (MP x ∆K) = 0‣ L KRearranging the expression gives us -∆K/∆L = MP /MP —therefore →• L K!✦- Input Substitution for Three Special Production TechnologiesPerfect substitutes‣ Two inputs are identical, so that a firm can exchange one for another at a fixed rate• !✦Perfect complements (fixed proportions)‣ When two inputs must be combined in a fixed ratio• !✦ ! 3 - 5! {chapter 7}The Cobb-Douglas production function‣ !• RETURNS TO SCALEConstant returns to scale Increasing returns to scale Decreasing returns to scalewhen a proportional change in all when a proportional change in all when a proportional change in allinputs produces the same inputs produces a more than inputs produces a less thanproportional change in output proportional change in output proportional change in outputIMPLICATIONS-

With increasing returns to scale, production is most efficient if there is a single producer. However, a single producer may not operate in a manner that would benefit consumers. More when we discuss natural monopoly in Chapter 17 PRODUCTIVITY AND TECHNOLOGICAL CHANGE.

Technological change: when a firm's ability to turn inputs into output changes over time

PRODUCTIVITY IMPROVEMENT

Higher productivity: when a firm can produce more output using the same amounts of inputs

Factor-neutral technical change: a productivity improvement that keeps the MRTS unchanged at every input combination

Reasons

Firms may be subject to different regulations or market circumstances

Examples: labor laws, union contracts

Firms may have different levels of technical, organizational knowledge, research and development; learning by doing! 4 - 5! {chapter 7}

REVIEW

A production method is efficient if there is no way to produce larger amounts of outputs using the same amounts of inputs

Production with one

Variable input: when the marginal product of labor is larger than the average product of labor, the average product is increased by the marginal units of labor.

A firm has constant returns to scale if a proportional change in all inputs leads to the same proportional change in output.

A firm is more productive when it can produce more output using the same amount of inputs.

LOOKING FORWARD

Next, we will learn how firms put together their production possibilities, with the cost of individual inputs, to determine the optimal combination of inputs for different outputs, and the resulting cost of production for each level of output.

SUMMARY! 5 - 5! {chapter 8}

Cost INTRODUCTION

LEARNING OBJECTIVES

• Describe various types of cost and the characteristics of each.
• Identify a firm's least-cost input choice, and the firm's cost function, in the short- and long-run.
• Understand the

Concepts of Average and Marginal Cost:

Describe the effect of an input price change on the firm's least-cost input combination.

Explain the relationship between short-run and long-run cost.

Define economies and diseconomies of scale and explain their relationship to the concept of returns to scale.

OVERVIEW

There are several types of cost: fixed vs. variable; avoidable vs. sunk; out-of-pocket vs. opportunity costs.

We will start with the simpler case of one variable input, then expand to cost minimisation with two variable inputs.

Along the way, we will learn several new tools, such as isocost lines, and average and marginal cost curves.

Compared to the short run, costs can be lower in the long run.

As firms grow and increase the use of all inputs, average costs may increase or decrease – economies of scale. A similar phenomenon may happen when new lines of products are introduced – economies of scope.

TYPES OF COST

Total cost: Total cost = C = FC + VC(output)