CHAP. 8 Flashcards
WHAT IS TECHNICAL EFFICIENCY
Technical efficiency occurs when a given number of inputs are combined in such a way as to maximize the level of output.
HOW DO FIRMS MAXIMIZE PROFITS
The firm chooses the lowest cost combination of labour and capital.
WHAT IS COST MINIMIZATION
An implication of profit maximization that firms choose the production method that produces any given level of output at the lowest possible cost.
WHAT ARE THE CONDITIONS FOR COST MINIMIZATION
MPk/Pk = MPl/Pl or MPk/MPl = Pk/Pl
k= capital
l = labor
WHAT IS THE PRINCIPLE OF SUBSTITUTION IN PRODUCTION
The principle of substitution is the principle that methods of production will change if relative prices of inputs change, with relatively more of the cheaper input and relatively less of the more expensive input being used
WHAT IS THE LONG-RUN AVERAGE COST (LRAC)
The long-run average cost (LRAC) curve is the curve showing the lowest possible cost of producing each level of output when all inputs can be varied.
The LRAC is the boundary between cost levels that are attainable, with known technology and given factor prices, and those that are unattainable
Since all costs are variable in the long run, we do not need to distinguish between AVC, AFC, and ATC, as we did in the short run.
WHEN DOES A FIRM HAVE ECONOMIES OF SCALE
When the long-run average cost is falling: over the range of 0 to Qm = minimum efficient scale (the smallest output at which LRAC reaches its minimum)
WHAT IS ECONOMIES OF SCALE
*Economies of scale is a reduction of long-run average costs resulting from an expansion in the scale of a firm’s operations so that more of all inputs is being used.
WHAT ARE INCREASING RETURNS
*Increasing returns is a situation in which output increases more than in proportion to inputs as production increases.
WHEN DOES A FIRM HAVE INCREASING RETURNS
Over the range of output from zero to Qm
AT Qm
*the firm experiences constant returns (a situation in which the output increases in proportion to inputs as production is increased)
*minimum efficient scale
Over the range of output greater than Qm
The firm is experiencing decreasing returns (a situation in which output increases less than in proportion to inputs as production increases.)
WHAT IS DISECONOMIES OF SCALE
When a firm is experiencing decreasing returns
LRAC VS STRATC
*The LRAC curve shows the lowest cost of producing any output when all factors are variable.
*SRATC curve shows the lowest cost of producing any output when one or more factors are fixed.
LRAC = Long-run average cost
STRATC = Short-run average total cost
WHY CAN’T NO SHORT-RUN CURVE EVER FALL UNDER THE LRAC
Because the LRAC curve represents the lowest attainable cost for each possible output.
Each SRATC curve is tangent to the LRAC curve at the level of output for which the quantity of the fixed factor is optimal and lies above it for all other levels of output.
