Professional Documents
Culture Documents
(Ch. 20)
Dr Bibhas Saha
b.c.saha@durham.ac.uk
Objectives:
´ Short run
´ 1) Technology (i.e., production function) cannot be changed [the
firm is stuck with the technology it got, even if it is not state of the
art]
´ 2) Some factors of production cannot be adjusted upwardly,
downwardly, or both ways.
´ Long run
´ Every aspect of technology can be potentially changed.
´ All inputs can be freely adjusted.
Short run
´ Example:
´ 1) A university can find a temporary teacher on a short notice, but a film
production company may not quickly replace a screenplay writer.
´ Reason: Apart from the availability, union agreements can be a factor.
´ 2) A café can quickly install a new automatic coffee maker but may not be
able to hire another employee.
´ Assume: one of the two (or many) inputs remains fixed; cannot
be increased or decreased
Other short-run possibilities
´ But we will assume that for some input(s) neither (upward or downward) adjustment
is possible.
Short run production: Imperfect
substitute inputs
x2
A D
𝑥̅! B C
y’ y’’
x1
x2
𝑥̅!
y’’
y’
y
x1
x2
𝑥̅!
y’’
y y’
x1
´ It is hard to tell.
´ [Keynes once famously said: In the long run we are all
dead.]
´ Netflix took ten years to establish itself.
´ Stand alone movie theatres disappeared after 40/50
years of existence.
´ Confusing!!
´ For small businesses both are same. But for large corporations
they can be different.
!/#
´ Assume x2 is fixed at 8 units. 𝑦 = 12𝑥!
&$
´ SOC: π!! 𝑥" < 0 ⟹ − & <0
'%"%
´ [Diminishing returns to factor is required]
´ Cobb-Douglas technology:
' #/(#+$)
´ 𝑥# = 𝐵 (!
where B is a constant
Properties of the short-run input
demand functions
#/.
-' ./% ' #/%
´ 𝑦 = 12 (!
= 24 (!
( */! +( ,/!
´ Profit: 𝜋' = 𝑝24 )!
− 𝑤* )!
− 8𝑤!
"
("/$ ($
´ 𝜋' = 24 !/$ −8 ! − 8𝑤!
)!
)!$
("/$
´ = 16 !/$ − 8𝑤!
)!
Short-run profit function
´ General Cobb-Douglas:
! !
- . !%& ( !%&
´ 𝜋' = 1 − 𝑎 𝐴𝑎 𝑥̅ ! & − 𝑤! 𝑥̅!
)!!%&
!
. !%&
´ Also check that in our example, 1 − 𝑎 𝐴𝑎- 𝑥̅! =
*
1− 24 = 16
,
x1 y
p
Concave
Because a=1/3
(<1/2)
p p p
−8𝑤!
Short-run functions
Graphically, when flipping the axes
p p
p
When a<1/2
x1 y −8𝑤! p
´ Problem:
𝑝𝑀𝑃, = 𝑤
𝑝𝑀𝑃- = 𝑣
%&#
´FOCs also imply cost minimisation: 𝑇𝑅𝑆 = − = − 𝑤/𝑣
%&$
Input choice
´ SOCs for a maximum:
p𝐾𝐾 = 𝑓𝐾𝐾 < 0
p𝐿𝐿 = 𝑓𝐿𝐿 < 0
p𝐾𝐾 𝜋,, − p𝐾𝐿2 = 𝑓𝐾𝐾𝑓𝐿𝐿 – 𝑓-, 2 > 0
𝐾 ∗ = 𝐾 𝑝, 𝑣, 𝑤 and 𝐿∗ = 𝐿(𝑝, 𝑣, 𝑤)
Fix 𝑣 = 4, 𝑤 = 16
* *
max 𝜋 𝐾, 𝐿 = 𝑝4𝐾 + 𝐿+ − (16𝐿 + 4𝐾)
0,2
𝜕𝜋 1 *
3
, *
3
,
= 𝑝4𝐾 + 𝐿 + − 16 = 0 → 𝑝𝐾 + 𝐿 + = 16 ⋯ ⋯ ⋯ (1)
𝜕𝐿 4
𝜕𝜋 1 3
, *
3
, *
= 𝑝4𝐾 𝐿 − 4 = 0 → 𝑝𝐾 + 𝐿+ = 4 ⋯ ⋯ ⋯ ⋯ (2)
+ +
𝜕𝐾 4
(!) (
= 4 → 𝐾 = 4𝐿 ⋯ ⋯ ⋯ (3)
($) '
Long
Examplerun profit maximisation-input
continued:
choice
! "
+% ,-!/%
𝑝(4𝐿) 𝐿
% = 16 à = 16
'
,' -!/' ,'
= 𝐿∗ ⟹ 𝐿∗(𝑝) =
!.' !$0
𝑝 $4𝑝$
𝐾 ∗(𝑝) = 4𝐿∗ = =
128 32
,' ,' ,
𝑦∗ =𝑓 𝐾 ∗, 𝐿∗ =4 !/- !/- =
#$ !$0 $
* *
𝑝 *3-3. 𝑝 *3-3.
𝑥* = 𝐵* , 𝑥! = 𝐵!
𝑤**3. 𝑤!. 𝑤*- 𝑤!*3-
- .
𝑝 *3-3. 𝑝 *3-3.
𝑦= 𝐴𝐵*- 𝐵!.
𝑤**3. 𝑤!. 𝑤*- 𝑤!*3-
*
-4. *3-3.
𝑝
𝑦 = 𝐴𝐵*- 𝐵!.
𝑤*- 𝑤!.
If a+b=1/2 the output supply function will be linear in the output price
General Cobb-Douglas case (check at home)
Profit function
𝜋 = 𝑝𝑦 − 𝑤* 𝑥* − 𝑤! 𝑥!
* * *
𝑝-4. *3-3. 𝑝 *3-3. 𝑝 *3-3.
𝜋 = 𝑝 × 𝐴𝐵*- 𝐵!. − 𝑤* 𝐵* − 𝑤! 𝐵!
𝑤*- 𝑤!. 𝑤**3. 𝑤!. 𝑤*- 𝑤!*3-
*
𝑝 *3-3.
𝜋 = (1 − 𝑎 − 𝑏) 𝐵,
𝑤*- 𝑤!. B3 is some constant
´ Hotelling’s Lemma:
56((,)!,)$)
´ = 𝑦(𝑝, 𝑤* , 𝑤! ),
5(
56((,)!,)$) 56((,)!,)$)
´ = −𝑥* (𝑝, 𝑤* , 𝑤! ) and = −𝑥! (𝑝, 𝑤* , 𝑤! )
5)! 5)$
()(+,-! ,-" )
´ Hotelling’s Lemma: = 𝑦(𝑝, 𝑤/ , 𝑤0 ),
(+
= 𝑦 𝑝, 𝑣, 𝑤
56((,)!,)$) 56((,)!,)$)
= −𝑥* (𝑝, 𝑤* , 𝑤! ) and = −𝑥! (𝑝, 𝑤* , 𝑤! )
5)! 5)$
Long-run versus short-run profit functions
𝜕𝜋
𝜕𝑝 Short-run
profit
𝜕𝜋'
function
𝜕𝑝
p
p0
56 56(
> LeChatelier principle
5( 5(
References
1. Varian Ch. 20
(Supplementary)
1. Snyder and Nicholson 11th edition, Chapter 11
2. Nechyba, 3rd edition, Chapter 12