EC120 Lecture Notes - Lecture 12: Tangent, Marginal Product, Production Function
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Document Summary
Technical efficiency: use fewest inputs for a given q. A firm minimizes cost of a given q by equating . Marginal product per dollar across all inputs, i. e. - relative productivity and relative costs, i. e. Marginal product per dollar across all inputs, i. e. - relative productivity and relative costs, i. e. principle of substitution: Cost minimization implies firms pick labour (capital) intensive method of labour (capital) is relatively cheap. If mpl/pl = mpk/pk and then pl falls . Firms respond by increasing labour (l) and reducing capital (k) Fall of mpl and rise of mpk until mpl/pl = mpk/pk. Implication: labour intensive methods used if labour is relatively abundant and thus relatively cheap. Shows the lowest ac when all inputs can be varied. Is tangent to each sratc (short run average total cost) Tangency does not necessarily involve min sratc. Shifts if input prices or technology changes. Minimum efficient scale (mes): lowest q that minimizes lrac.
