chapter 6 Flashcards
what is the “theory of the firm”?
it is how firms act in the market place
what are the 3 components of the “theory of the firm”?
explanation of how a firm makes cost minimizing production decisions and how its costs varies with its outputs
we assume firms are rational and make choices to maximize profits/ minimize costs
firms offer a means of coordination that is extremely important and would be missing if workers operated independently
why do we need firms in the market?
firms organize and coordinate production as well as decide price and manage workers
what is the firms mechanism for coordination?
contracts
what do contracts include?
terms and conditions and duties and timelines
what are the 3 steps within production?
production technology/ function
cost constraints
input choices
what is production technology/ function?
how inputs such as labour, capital and raw materials can be transformed into outputs
pretty much how firms make their products
what is the goal of a production function?
want to produce products and the lowest costs
what are cost constraints?
when firms must take into account the prices of inputs, similar to cost constraint for consumers
what are input choices?
given its production technology and the prices of inputs, the firms must choose how much of each input to use in producing its output
what is the optimal amount of inputs?
the amount that maximizes output and minimizes cost
what are firms efficient in doing?
coordination production
what is the production function?
shows the highest output that a firm can produce for every specified combination of inputs
what is an example of a production function?
output (q)= F(K,L)
what does a production function describe?
what is technically feasible when the firm operates efficiently, that is, when the firms uses each combination of inputs (K,L) as effectively as possible
what is the short run?
the period of time in which quantities of one or more production cannot be changed/ fixed
what is the long run?
amount of time needed to make all production inputs variable
what is an example of a production factor being fixed in the short run?
say you purchase a new building, on a 2 year mortgage, you have that fixed cost of capital for the next 2 years until it is payed off, so in the short run this factor is fixed
what is the difference between the short run and long run?
short run has fixed inputs and input prices
long run has flexible inputs and input prices
why are inputs flexible in the long run?
because you have enough time to get rid of fixed costs or any fixed commitments to factors of production
what us the average product?
output per unit of a particular input
what is the formula for average product of labour?
output/ labour input
q/L
what is marginal product?
additional output produced is increase by one unit
what is the formula for marginal product of labour?
change in output/ change in labour input
is marginal product key for a firm?
it is key for optimal point/ levels of inputs for firms to minimize costs and maximize profits
how would a firm maximize output and productivity?
they would pick the amount of labor that has the lowest marginal product of labour before it hits 0, this leads to most output and highest profits with the lowest possible costs
what is the slope of a graph showing Y, output per months X, labor per month?
it is marginal product, as the line goes up the marginal product is growing, when it starts to level out that means it is shrinking and when it starts to go down that means the marginal product is 0
when is the average product = to marginal product?
when the slope of the line is in tangent/ inline with the origin (refer to production slide 8)
when the slope of a curve showing the output per month and labour per moth, when does marginal product start to decrease?
when the slope is is parallel to the origin
what is the law of diminishing marginal returns?
a principle that as the use of an input increase with other inputs fixed, the increases to output will eventually decrease
when adding more inputs doesn’t lead to more outputs
what is the effect of technological improvement?
labour productivity (output per unit of labour) can increase if there are improvements in technology
if there are technological improvements, can that stop diminishing returns from happening?
no, there will always be diminishing returns, the improved technology can only let all workers produce more and delay the point at which diminishing returns happen
how does technological improvement impact diminishing returns?
each worker will have diminishing returns even with improved technology, but they will be more productive with that new technology and diminishing returns for the workers will happen later due to the technology improvement
what is human capital?
the mixture of healthcare and education
what can cause marginal diminishing returns?
the increase in one input of production with all other inputs of production being fixed (adding more workers without having enough capital for them all)
how will an increase in technology impact the production function?
it will increase the production function
what are isoquants?
curves showing all possible combinations of inputs that yield the same output (similar as indifference curves)
what is the marginal rate of technical substitution (MRTS)?
the amount by which the the quantity of one uncut can be reduced for one extra unit of another input, so output stays the same
what is the slope of isoquants?
the marginal rate of technical substitution (similar to the marginal rate of substitution for consumers)
when isoquants are straight lines, what does that mean?
means that the rate at which capital and labour can be substitutes for each other is the same no matter what level of inputs are being used and will result in same output
if the slope of an isoquant is straight up and down, how does that impact output?
no matter what combination of input and output, it will produce the same amount of output
what is the slope of an isoquant when inputs are perfect substitutes?
the slope will be a straight line at an angle (constant)
what are fixed-proportions production functions?
when only one combination of labour and capital can be used to produce a given output, adding more of one input will not increase output, need to add more of both
if you have a fixed-proportions production function, and you add more capital without more labour, how will that impact output?
it will not, need to add more of both equally
what is an example of a fixed-proportions production function?
working in research, if you add more researchers without adding more capital (computers) you will not increase output due to the need for capital to equal labor
what are returns to scale?
changes in production when we change all inputs at the same time at a constant rate, and how that impacts the output
what are the 2 returns to scale?
constant returns to scale
increasing returns to scale
what are constant returns to scale?
when a firms production process exhibits constant returns to scale, the isoquants are equally spaced because each time the inputs are increase by the same proportions the output also increases by the same proportions
what is an example of constant returns to scale?
output is 10, when capital is 2 and labour is 5, when capital is doubled to 4 and labour is doubled to 10 than output is doubled to 20
what is increasing returns to scale?
when a firms production process exhibits increasing returns to scale, the isoquants move closer together as inputs are increased,
what is an example of increasing returns to scale?
output is 10, when capital is 2 and labour is 5, when capital is doubled to 4 and labour is doubled to 5 output increases to 32
the output does not increase proportionally to the increase of inputs
