ECON20002 Lecture Notes - Lecture 12: Diminishing Returns, Factors Of Production, Negative Number

• School: University of Melbourne
• Department: Economics
• Course: ECON20002
• Professor: Reshad Ahsan

Document Summary

To examine how costs evolve with output we need to model how firms choose their optimal combination of inputs theory of the firm. Production decisions of firms can be understood in three steps. Steps are the building blocks of the theory of the firm. Output will depend on cost of labour, capital and materials. Function shows the highest output (q) a firm can produce for every specified combination of inputs. Define production functions using only labour (l) and capital (k) =(,) Inputs and outputs are flow variables measured over interval of time. Firms use certain amount of l and k each year to produce output over that year. Period of time in which quantities of one or more production factors cannot be changed. Long run is amount of time needed to make all production inputs variable. No specific time period that separates short run from long run. Assume the function is monotonic as l increases, q also increases.