Chap 6 - Firms & Production Flashcards by Clay temprano

Limited Liability

Condition whereby the personal assets fo the owners of the corporation cannot be taken to pay a corporation’s debts it it goes into bankruptcy.

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Profit

The difference between Revenues, R, and costs, C; pi = R - C

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Efficient Production or Technological Efficiency

Situation in which the current level of output cannot be produced with fewer inputs, given existing knowledge about technology and the organization of production.

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Production Function

The relationship between the quantities of inputs used and the maximum quantity of output that can be produced, given current knowledge about technology and organization.

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Shot Run

A period of time so brief that at least one factor of production cannot be varied practically

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Fix Input

a factor of production that can be varied practically int he short run

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Variable Input

a factor of production whose quantity can be changed readily by the firm during the relevant time period.

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Long Run

a lengthy enough period of time that all inputs can be varied.

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Marginal Product of Labor (MPL)

The change in total output, resulting from using an extra unit of labor, holding other factors constant.

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Average Product of Labor (APl)

The ratio of output to the number of workers used to produce that output.

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Isoquant

a curve that shows the efficient combinations of labor and capital that can produce a single level of output

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Three properties of Isoquants

) The farther an isoquant from the origin, the greater the level of output.
) Isoquants do not cross.
) Isoquants slope downward.

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Marginal Rate of Technical Substitution (MRTS)

The number of extra units of one input needed to replace one unit of another input that enables a firm to keep the amount of output it produces constant.

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Constant Returns to Scale (CRS)

Property of a production function whereby when all inputs are increased by a certain percentage, output increases by that same percentage.

f(2L,2K) = 2f(L,K) = 2q

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Increasing Returns to Scale (IRS)

Property of a production function whereby output rises more than in proportion to an equal increase in all outputs.

f(2L,2K) > 2f(L,K) = 2q

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Decreasing Returns to Scale (DRS)

Property of a production function whereby output increases less to an equal percentage increase in all inputs.

f(2L,2K)

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Technical Progress

An advance in knowledge that allows more output to be produced with the same level of outputs.

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What are three of the big decisions that firms need to make?

) How a firm is owned and managed?
) Firm must decide how to produce.
) If a firm wants to expand output, it must decide how to do that in both the short run and the long run.
) Given its ability to change its output level, a firm must determine how large to grow.

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Production

A firms converts inputs into outputs using on e of the available technologies.

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What are the three broad categories of inputs, generally?

) Capital (K): Long lived inputs such as land, buildings (factories, stores), and equipment (machines, trucks).
) Labor (L): Human services such as those provided by managers, skilled workers (architcts, economists, engineers, plumbers), and less-skilled workers (custodians, construction laborers, assembly-line workers).
) Materials (M) Raw goods (oil, water, wheat) and processed products (aluminum, plastic, paper, steel).

What kind of condition is efficient production for profit maximization?

) Efficient production is a necessary condition for profit maximization.
) But efficient production alone is not a sufficient condition to ensure that a firm’s profits are maximized.

How long it takes for all inputs to be variable depends…

on the factors a firm uses

The relationship between output or total production can be illustrated by …

using a particular production function.

Law of Diminishing Marginal Returns

holds that if a firm keeps increasing an input, holding all other inputs and technology constant, the corresponding increase in output will become smaller eventually.
- That is if only one input is increased, the marginal product of that input will diminish eventually.

What has a geometric interpretation in terms of the total product curve?

The Marginal Product of Labor (pg. 161)

With greater specialization...

workers are assigned to tasks at twhich they are especially adept , and time is saved by not having workers move from task to task.

The three curves are geometrically related.

1. ) The relationship between the average and marginal product of labor curves. 2. ) The relationship between the total product curve and the two other curves.

How to understand average product of labor curve when its sloping upward in relation to the Marginal Product of Labor Curve being above or below it?

The average product of labor curve slopes upward where the marginal product of labor curve slopes upward where the marginal product of labor curve is above it and slopes downward where the marginal product curve is below it?

What is stronger, to say there are diminishing returns or diminishing marginal returns?

Diminishing returns.

What is a common mistake in terms of claiming that marginal products must fall as we increase an input without requiring that technology and other inputs stay constant?

If we increase labor while simultaneously increasing other factors or adopting superior technologies, the marginal product of labor may rise indefinitely.

Can a firm substitute from one input to another while maintaining the same level of output?

Yes, this is much like maintaining utility for a consumer along an indifference curve.

What are the three major properties of isoquants, that arise predominately from firms' producing efficiently?

1. ) The farther an isoquant is form the origin, the greater the level of output. 2. ) Isoquants do not cross 3. ) Isoquants slope downward (pg. 165)

What does the curvature of an isoquant show?

How readily a firm can substitute from one input to another.

If the inputs are perfect substitues, each isoquant is...

a straight line

What type of production function requires that inputs must be used in fixed proportions?

A fixed-proportion production function q = x + y

What does the declining MRTS along an isoquant illustrate?

This decline in the MRTS (in absolute football) along an isoquant as the firm increases labor illustrates diminishing marginal rates of technical substitution. - The curvature of the isoquant away from the origin reflects diminishing marginal rates of technical substitution.

What does the marginal rate of technical substitution (the degree to which inputs can be substituted for each other) equals..

equals the ratio of the marginal product of labor to the marginal product of capital.

For a Cobb-Douglas production function what do the constants determine?

The constants determine the relationships between the marginal and average products of labor and capital.

What are some reasons for decreasing returns to scale?

1. ) The difficulty of organizaing, coordinating, and integrating activities with firm size. 2. ) Large teams of workers may not function as well as small teams, n which each individual takes greater personal responsibility.

Even is each firm in a market produces as efficiently as possible ...

firms may not be equally productive - one firm may be able to produce more than another from a given amount of inputs.

How can we measure the relative productivity of a firm?

By expressing the firm's actual output, q. as a percentage of the output that the most productive firm in the industry have produced, q*, from the same amount of inputs: 100q/q*

Nonneutral technical changes

are innovations that alter the proportion in which inputs are used.

Better management or organization of the production process

allows the firm to produce more output from given levels of output

The Spacing of the Isoquants determines...

the returns to scale.

Are isoquants always non linear?

Isoquants can be linear when inputs are perfectly substitutable, and thus it is not the case that they are always non-linear.

In the long run, firms should decide to shut down if what condition holds?

Price is less than both average cost and average variable cost.

In the long run, what cost measure is minimized?

Average Cost | - In the long-run, average cost is minimized and the equilibrium is found where price equals minimum average costs.

Which of the following is a reason that the long-run supply curve may not be flat and may instead be upward-sloping?

Firms are different (i.e., some have lower costs than others). - Entry is limited. - Input prices increase with output.