Chapter 5 - Supply Decisions Flashcards
What is supply?
the ABILITY and WILLINGNESS to sell/produce specific quantities of a good at alternative prices in a given time period
What is production function?
The technological relationship expressing the maximum quantity of a good attainable from different combinations of factor inputs
What does production function tell us?
The maximum amount of good producible (output) from varying amounts of factor inputs
The rate of output depends on how many ____are used
inputs
What is efficiency?
Achieving the maximum output attainable from given inputs
Explain the graph of production function
Y axis: output
X axis: input
graph is upward sloping. drastic increases, then steady, then decrease
Producing on a point on the production function indicates…?
you are being efficient. producing the most that can be produced
“Marginal”
One additiona
What is marginal physical product?
Change in total output associated with ONE ADDITIONAL unit of input
What is the formula for calculating marginal physical product
MPP=change in total output/change in input quantity
What is the Law of Diminishing Returns?
Diminishing marginal physical product (mpp) - additional units of inputs (resources) are less valuable to the firm
Marginal physical product ______ at a _______ rate
increases at a decreasing rate
Why does MPP decline?
As more labor is hired, each unit of labor has less capital and land to work with
if too much labor is added to a _____ level of ______, MPP may become ______
if too much labor is added to a FIXED level of CAPITAL, MPP may become NEGATIVE
Production function tells us how much a firm _____ produce but not how much it will ____ to produce.
COULD, WANT
The most desired rate of output is the one that _________________
MAXIMIZES TOTAL PROFT
How to calculate total proft?
Total revenue - Total Cost
How to calculate total revenue?
Quantity sold x price
What is total cost?
Market value of all resources used to produce a good or service
What are fixed costs?
Costs of production that DO NOT CHANGE with the total rate of output.
Will fixed costs still exist if a firm does not produce anything?
YES
What are variable costs?
Costs of production that change when the rate of output is altered
Any short run change in total costs is a result of…?
Changes in variable costs
What are the 2 costs of production?
Fixed costs and variable vosts
