6.1 Production Theory Flashcards
what is firms overriding goal
maximise profit
what is profit
Total rev (output x price) - total costs (implicit + explicit)
define explicit costs
opportunity cost of resources that take the form of a cash payment
define implicit costs
pportunity cost of firm using its own resources without a corresponding cash payment
formula for accounting vs economic profit
o Accounting Profit: total revenue - explicit costs
o Economic Profit: total revenue - explicit costs - implicit costs
define production theory
- relation b/w output and inputs necessary for production of that output
♣ how output varies as we vary input
define short run
♣ eriod of time where one of the factors of production are fixed
define long run
period of time where all factors of production are variable
what is marginal product and the formula
The extra output produced when the variable factor is increased by one unit
- change in Q over change in labor
what is the law of diminishing returns
property whereby marginal product of input declines as quantity of input increases (production curve= flatter)
what happens during increasing returns and decreasing returns
o Holding K constant, output will at first increase by increasing the amounts as labour is added (increasing returns)
o After a point, adding more labour will still increase output, but by smaller and smaller amount (diminishing returns)
is diminishing returns long or short term only
short term
describe returns to scale
he long run relationship between a given % change in inputs and resulting % change in output
what are the three types of returns to scale
♣ Constant returns to scale: if double all inputs, output doubles
♣ Increasing returns to scale: if you double all inputs, output more than doubles
♣ Decreasing returns to scale: if you double all inputs, output increases by less than double
