323 Exam 2 Review Flashcards
What is the goal of producers?
Maximize profits, while minimizing costs
Production
process of turning inputs into outputs
Production function
describes the relationship between combinations of inputs and a firm’s output
In the short run what is fixed?
Capital is fixed- denoted by k bar
Marginal Product of Labor
the additional output that a firm can produce using an additional unit of labor (most important when making decisions)
Marginal Product of Labor formula
MPL = change in output / change in Labor
Average Product
average output per worker
Average product of labor formula
APL = output / labor (Q/L)
What is it called when the MPL falls as the number of L goes up?
Diminishing Marginal returns to labor
In the long run what is fixed?
Nothing
Benefits of nothing being fixed in the long run
firms can lessen the effects of diminishing marginal returns
firms can substitute between capital and labor
Isoquants
a curve representing all combinations of inputs that yield the same output
what does an isoquant further from the origin represent?
a higher level of output
Isoquants describe…
tradeoffs, captured by the slope
slope = change in K / Change in L
Marginal rate of technical substitution formula
MRTSlk = - (change in K / change in L) positive number
Marginal Rate of Technical Substitution
the negative slope of the isoquant
isoquants that are relatively straight represent what?
relative substitutes
Isoquants that are relatively curved represent what?
Relative complements
MRTSxy can also equal Marignal products,
MRTSxy = MPx / MPy
Perfect complement isoquants characterisitcs
Used in fixed proportion
General equation form: Q = min {ax,by}
Example. 2x and 1 y
Q = min {x,2y}
Q =1
happy with a units of y and b units of x. flip the numbers for it to make sense.
Perfect substitute isoquants characteristics
Subbed at a fixed rate
Genreal form; Q = ax+by
Example 1 x & 2Y
Q = x +2y
What is the isocost line?
a curve that shows all input combinations that yield the same cost
Equation for Isocost Line
C= WL + RK
Slope, X -intercept & Y-Intercept of Isocost Line
Slope = -W / R
X-int. = C / W
Y- int = C / R
Tangency Condition for Cost Minimization
MPL/W = MPK/ R
or
MRTSLK = W/R
What are the 3 types of Returns to scale, explain each
Constant- If I double Inputs, I get double Outputs
Increasing- If I double Inputs, I get quadruple outputs
Decreasing- If I double inputs, I get 1/2 outputs
What is total factor productivity growth?
Technological Advance
When output increases when inputs do not change- due to technological advances.
What are the assumptions of a firms production behaviors?
1.) The firm produces a singe good
2.) The firm has already chosen which product to produce
3.) For whatever quantity it produces, main goal is minimize cost
4.) Firm can only use 2 inputs, capital & labor
5.) In the short run, capital is fixed. In long run nothing is fixed
6.) More inputs used = more output produced
7.) can buy as much K&L as it wants at a fixed market price
8.) If there is a well functioning capital market, the firm does not have a budget constraint
9.) a firms production exhibits diminishing marginal returns to labor or capital
A firm wants to _______ its costs for production?`
Minimize
Accounting Cost
The explicit or direct costs of a business.
Examples- wage rate, rental rate, raw materials
Economic Cost
Accounting Cost + Opportunity Cost
Does Economic Profit = Accounting Profit
No!
Accounting Cost Formula
Sum of all costs (excluding sunk costs)
Which type of profit should a firm pay attention to when making decisions?
Economic
Economic Cost Formula
Accounting Cost + Opportunity Cost
Fixed Cost (FC)
A type of cost that does not change with output. even when Q=0, firm must pay it.
Fixed Cost formula
FC = TC-VC
Variable Cost
a cost that changes depending on the output.
Variable Cost Formula
VC = TC - FC
Sunk Cost
costs that have already been paid and cannot be recovered. Sunk costs do not impact a firms decisions
Examples- Adverting spent on a firm, specific machinery for a firm, specific to that industry
Average Fixed Cost Formula
AFC = TFC /Q
Average Variable Cost Formula
AVC = TVC / Q
Marginal Cost
the additional cost incurred from producing one more unit of output
Average Total Cost Formula
ATC= TC / Q
Marginal Cost Formula
MC= Change in TC / Change in Q
Why is the slope of the AFC curve always downward sloping when Q is higher?
Because that fixed cost is divided by a larger Q.
Marginal Cost is the slope off
Total cost curve or Variable cost curve
Economies of scale
Total Cost Increase slower than output is increasing
Economies of Scope formula
(Cost Produced Separate - Cost produced together) / (cost produced together)
Constant Economies of Scale
Total cost & quantity increase at the same rate
Diseconomies of scale
Total cost increase faster than output increases
Perfect Competition Traits
Many firms
Homogenous/identical products
No barriers to entry or exit
price takers
If economies of scope is greater than 0 what does this mean?
It is cheaper to produce a good together
Economies of scope = 0.38, what does this mean?
It is 38% cheaper to produce the goods together
What does it mean to be a price taker?
Individual firms are unable to influence the market price by altering the quantity produced.
ie. if they produce more they dont make more. They only get the market price.
What does the demand curve look like for perfect competition?
Perfectly elastic, straight horizontal line
Formula for Profit
Profit = Total Revenue - Total Costs
When is profit maximized in Perfect Competition?
When P=MC
When Price > MC what is happening (perfect comp.)
the firm is producing but losing money
When P= MC what is happening? (perfect comp)
Profit is maximized
When P < MC what is happening (perfect comp)
Producing and incurring a cost.
Slope of the supply curve is always…. and why?
positive because the law of supply
As price goes up, Qs goes up as well
What does each point on a supply curve represent
Producers Marginal willingness to sell
Does a price shift move the whole supply curve?
NO, only a movement along the curve
3 things that shift a supply curve
Change in number of producers (more = outward shift)
Cost of Inputs changing (cheaper = outward)
Pricing of outside option
Price Elasticity of Supply Formula
% change in quantity supplied / % change in price
When price elasticity of supply is high we say it is
Elastic |Es| > 1
When price elasticity of supply is low we say it is
Inelastic
|Es| < 1
If price elasticity of supply is 0 we say it is
Perfectly Inelastic
When is a market in equlibrium
when Qd = Qs
a shift in demand with a flatter supply curve results in…
a smaller change in price and a higher change in quantity for equilibrium
a shift in demand with a steeper supply curve results in..
a higher change in price and a smaller change in quantity for equilibrium
Welfare formula
W= Ps + Cs
What causes markets to produce too little?
Price ceilings & floors
Quotas
Taxes
Market Power
What causes markets to produce too much
Subsidies
When Qd > Qs what occurs
market shortage
When Qd = Qs what occurs
Market clearing / equilibrium
When Qd < Qs what occurs
Market Surplus
if profit is negative should a firm shut down?
No. Only shutdown if total revenue is less than VC.
TR<VC<– shut down
What is producer surplus?
the benefit accrued to the producer from the sale of a product.
Producer Surplus formula
Market Price - Willingness to Sell
