Chapter 6

Question 1

why is producer theory important?

Answer 1

Because producers decide on how much of each commodity to sell and how much to produce and this impacts how much resources that are used (labor, capital, technology) to produce that particular good/service
We want these resources to be allocated to maximize societies well-being.
Understanding producers decisions

Question 2

Rational consumer

Answer 2

(demander/buyer) makes decisions that maximize its own utility given their limited budget (time & money)

Question 3

Rational producer

Answer 3

(supplier/seller) makes decisions that maximize its own profit given the demand

Question 4

Two important determinants for profit maximization

Answer 4

1. The additional cost to produce one more unit - determined by its production function and the price of inputs. Marginal cost!
2. The additional benefit gain by selling that additional unit on the market - depending on the price consumers are willing to pay. Marginal revenue!

Question 5

Important divison when talking about costs in economics

Answer 5

Accounting costs
Opportunity costs

Question 6

accounting costs

Answer 6

explicit cost
ex
salaries
capital costs
local costs

Question 7

opportunity costs

Answer 7

implicit costs
○ The value of the best option, the value we give up by using resources in the way we do

Question 8

production

Answer 8

Production is process that converts inputs into outputs

Question 9

production function

Answer 9

The two inputs can then be combined in a number of different ways
How much production we get out depends on:
The exact form of the production function
How much we use of each input product

Question 10

production function mathematical way

Answer 10

How much we get out of the labor and capital
Like the utility function for firms
Q = f (K,L)

Question 11

Production in the short run

Answer 11

A period of time during which at least on of the firm’s factors of production is fixed

Question 12

Production in the long run

Answer 12

A period of sufficient length in which all inputs are variable

Question 13

fixed factors of production

Answer 13

an input whose quantity can not be altered in the short run. Often capital (K)

Question 14

variable factors of production

Answer 14

an input whose quantity can be altered in the short run.

Question 15

Law of diminishing returns

Answer 15

When some factors of production are held fixed, the variable factor will at some point return a lower unit of output per added unit of input

Question 16

The cost function

Answer 16

Total cost: TC = r * K + w * L

Question 17

Total cost

Answer 17

The sum of all payments for all inputs
Fixed cost + variable cost

Question 18

Fixed cost

Answer 18

The sum of all payments for fixed inputs
Often the capital cost, like the 100 units of capital in the example

Question 19

Variable cost

Answer 19

The sum of all payments for variable inputs
The total labor cost

Question 20

Marginal cost

Answer 20

The change in total cost divided by the change in output

Question 21

Profit-maximization graphically

Answer 21

Profit = TR - Variable cost VC - Fixed cost FC

Question 22

Profit-maximization mathematically - slope for the cost curve

Answer 22

• Slope for the cost curve show how much the total cost change when quantity produced (Q) changes with one unit
  Marginal cost: MC = dTC/dQ = TriangleTC/TriangleQ

Question 23

Profit-maximization mathematically - slope for the revenue curve

Answer 23

• Slope for the revenue curve shows how much the total revenue changes when quantity produced (Q) changes with one unit
  Marginal revenue: MR = dTR/dQ = TriangleTR/TriangleQ

Question 24

Profit maximizing - supply curve

Answer 24

learn it in one note

Question 25

Average costs

Answer 25

AFC, AVC and ATC

Question 26

Profit mX - Market supply curve

Answer 26

Supply curves will be MC as long as MC > AVC