Chap. 6 - Production Theory Flashcards
In order for a firm to produce what must be employed?
Land, Labor, Capital, Entrepreneurship
What is Total and Marginal Product?
Total product is simply the output that is produced by all of the employed workers.
Marginal product is the additional output that is generated by an additional worker.
If Marginal Product is increasing what is happening with Total Product?
Total Product is increasing at an increasing rate.
What is the equation for Marginal Product?
MP = ∆TP/∆L (change in TP/change in Labor)
What is the law of diminishing marginal returns?
It states that as successive amounts of the variable input, i.e., labor, are added to a fixed amount of other resources, i.e., capital, in the production process the marginal contribution of the additional variable resource will eventually decline.
When Marginal Product begins to fall, but is still positive what happens with Total Product?
Total Product is still increasing but at a decreasing rate.
Where would an employer want to produce, in terms of Marginal and Total Product.
We know that we would not stop in the region where marginal product is increasing and we would not produce in the region where marginal product is negative. Thus we will produce where marginal product is decreasing but positive, for Total Product usually in the range where TP is increasing but at a decreasing rate.
What are the equations for Total Product, Marginal Product and Average Product.
TP = Summation of Marginal Product MP = change in TP/change in Labor AP = TP/L
What are explicit and implicit costs?
Explicit costs are out-of-pocket expenses, such as payments for rent and utilities, and implicit costs reflect the opportunity costs of not employing the resource in the next best option.
What is a normal profit?
A normal profit is the minimum return to maintain a resource in its current use.
Using the information below, compute the explicit and implicit costs, the accounting and economic profits.
Total Revenue $600,000
Cost of materials $200,000
Wages to employees $250,000
Foregone wage $100,000
Foregone rent and interest $80,000
Then explain what will happen in this industry and why.
Explicit = 200,000 + 250,000 = $450,000
Implicit = $100,000 + $80,000 = $180,000
Acct. Profit = 600,000 - 450,000 = 150,000
Econ Profit = 150,000 - 180,000 = -30,000
Although the business owner is earning an accounting profit of $150,000, her economic profit is negative meaning that she could earn more by shutting down the business and employing the resources in their next best alternative. Thus if this loss continues, we would anticipate the owner would exit this business.
In the short run at least one cost is _____, while in the long run all costs are ______.
Fixed
Variable
As production increases, total variable costs _______ at a decreasing rate. Why?
Increases
The marginal product for each additional worker is increasing.
With diminishing marginal product, the total variable cost ________ at an increasing rate. Why?
Increases
The marginal product for each additional worker is decreasing.
What is the equation for Total Cost?
TC = FC + VC
Describe the TC, FC, VC on a graph.
On the y axis there is price, on the x axis there is quantity. Total Fixed costs is a horizontal line.Total variable cost increases at a decreasing rate then increases at an increasing rate due to marginal product. TC mimics VC but is shifted up by the amount of FC.
What are the equations for MC, TC, ATC, AFC, AVC, ATC?
MC = change in TC/change in Q or change in TVC/change in Q TC = TFC + TVC ATC = TC/Q AFC = TFC/Q AVC = TVC/Q ATC = AFC + AVC
Marginal Cost intersects Average Variable cost and Average Total Costs where?
MC intersects them both at their minimums.
When marginal product is at a _____, then marginal cost must be at a ______.
When marginal product is ______, the marginal cost of producing another unit of output is _______ and when marginal product is ______ marginal cost is ______.
peak/maximum minimum rising declining declining rising
When average product is _____, average variable cost is _____, and when average product is _____, average variable cost is _____.
rising
falling
falling
rising
When total product is increasing at an ________ rate the total cost is increasing at a ________ rate. When total product is increasing at a ________ rate, the total cost is increasing at an _______ rate.
increasing
decreasing
decreasing
increasing
Assuming all factors are variable, the long run average cost curve shows what? How is it obtained?
The minimum average cost of producing any given level of output.
It is obtained by combining the possible short-run curves (i.e. it is obtained by combining all possible plant sizes).
What is economies of scale?
Increasing output reduces the per unit cost.
What are some of the reasons for this?
As plant capacity increases, firms are able to specialize their labor and capital to a greater degree. Spreading out of the design and start up costs over a greater output amount. Bulk Purchasing.
What is the minimum efficient scale?
The plant size (or scale of operation) that a firm must reach to obtain the lowest average cost or exhaust all economies of scales.
What are constant and diseconomies of scale?
The region where long run average costs remain unchanged as plant size increases is known as constant returns to scale. Diseconomies of scale occurs when average costs increase as plant size increases.
What is economies of scope?
Lowers the per unit cost as the range of products produced increases.
