8 Modelling Costs of Production Flashcards
General cost function for y = KaLb
How can you get the intercepts of an isocost line?
What is the slope of an isocost line for c = wL + rK?
Isocost line on a diagram
If relative costs are constant but total cost changes, how can we illustrate this?
New isocost line is parallel to the one before.
What are Output Expansion Paths?
The locus of points at which the isocost and isoquant lines are tangent, following the standard replication argument.
How can we plot a cost function?
Plot cost against output: c = c(y)
How can we determine returns to scale from factor demands?
If a + b = 1 then c(y) is linear: CRS
If a + b < 1 then c(y) is convex: DRS
If a + b > 1 then c(y) is convex: IRS
Define the short run (microeconomics)
A period during which some factor of production is fixed.
Define average cost + equation
The average cost per unit produced.
How is average cost calculated diagrammatically?
As the slope of the ray from the origin to the point on the cost function.
Define marginal cost + equation
The effect on total cost of producing one additional unit of output.
How is marginal cost calculated diagrammatically?
As the slope of the cost function at any given point.
RULES about the relationship between MC and AC
Define fixed costs + equation
The elements of costs which do not change as output changes. They are short-run phenomena by definition.
F
Define variable costs + equation
The elements of costs which change as output changes.
Equation for average variable cost function
Equation for average fixed cost function
Diagram for total costs and variable costs
Diagram for AC, MC, AFC and AVC
How can we determine total costs from AC and AVC curves?
As the area (multiplication)
How do short run costs relate to long run costs?
