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ECO 302 > Chapter 6 > Flashcards

Chapter 6 Flashcards

1
Q

How businesses are organized affects who makes decisions and the firms objective, such as whether it tries to maximize profit

A

Ownership and Management of Firms

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2
Q

An organization that converts inputs, such as labor, materials, energy, and capital, into outputs, the goods and services that it sells

A

Firm

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3
Q

Consists of firms owned by individual or other non governmental entities whose owners try to earn a profit

A

Private Sector

aka

For-Profit Private Sector

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4
Q

This sector contributes the most to the GDP (gross domestic product - a measure of the country’s total output)

A

Private Sector

aka

For-Profit Private Sector

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5
Q

Consists of firms and organizations that are owned by government or government agencies

A

Public Sector

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6
Q

Consists of organizations that are neither government owned nor intended to earn a profit

A

Non Profit Sector

aka

Not-For-Profit Sector

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7
Q

What are the three legal forms of organization for firms in the private sector?

A
  1. Sole Proprietorship
  2. General Partnership
  3. Corporation
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8
Q

Firms owned by a single individual

A

Sole Proprietorship

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9
Q

Businesses jointly owned and controlled by two or more people operating under a partnership agreement

A

Partnerships

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10
Q

Condition whereby the personal assets of the owners of the corporation cannot be taken to pay a corporations debts of it goes into bankruptcy

A

Limited Liability

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11
Q

In this organization, the most shareholders can lose is the amount they paid for their stock

A

Limited Liability

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12
Q

The purpose of this organization is to allow firms to raise funds and grow beyond what was possible when owners risked personal assets on any firm in which they invested

A

Limited Liability

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13
Q

The difference between what it earns from selling a good and what it pays for labor, materials, and other inputs

A

Profit

Profit= R-C
R= price*quantity
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14
Q

The current level of output cannot be produced with fewer inputs, given existing knowledge about technology and the organization of production

A

Efficient Production

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15
Q

If given the quantity of inputs used, no more output could be produced using existing knowledge

A

Efficient Production

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16
Q

A necessary condition for profit maximization but it alone is not a sufficient condition to ensure that a firms profit is maximized

A

Efficient Production

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17
Q

Summarizes how a firm converts inputs into outputs using one of the available technologies

A

Production Function

Units of Output=
q=f(L,K)

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18
Q

The relationship between the quantities of inputs used and the maximum quantity of output that can be produced, given current knowledge about technology and organizations

A

Production Function

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19
Q

Has constant returns to scaled if, when the firm doubles it’s input, it’s output also doubles

f(2K,2L)=2f(L,K)=2q

A

Production Process

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20
Q

Long-lived inputs such as land, buildings (factories, stores), and equipment (machines, trucks)

A

Capital (K)

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21
Q

Human services such as those provided by managers, skilled workers (architects, economists, engineers, plumbers), and less skilled workers (custodians, constructions laborers, assembly-line workers)

A

Labor (L)

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22
Q

Raw goods (oil, water, wheat) and processed products (aluminum, plastic, paper, steel)

A

Materials (M)

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23
Q

Shows only the maximum amount of output because it includes only efficient production processes

A

Production Function

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24
Q

A period of time so brief that at least one factor of production cannot be varied practically

A

Short Run

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25
Q

A factor of production that cannot be varied practically in the short run

A

Fixed Input

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26
Q

A factor of production whose quantity can be changed readily by the firm during the relevant time period

A

Variable Input

27
Q

A lengthy enough period of time that all inputs can be varied

A

Long Run

28
Q

All factors of production are variable inputs in the

A

Long Run

29
Q

What has greater flexibility? The long run or the short run?

A

Long Run

30
Q

Only some inputs can be varied so the firm changes its output by adjusting its variable inputs

A

Short-Run Production

q=f(L,K)
K has bar over it because it has a fixed number of units of capital

31
Q

Output

A

Total Product

32
Q

The change in total output, /\ q, resulting from using an extra unit of labor, /\ L, holding other factors constant

A

Marginal Product of Labor
(MP v L)

MPvL = /\q divided by /\L

33
Q

Determines how much an extra worker will increase output

A

Marginal Production of Labor

34
Q

The ratio of output, q, to the number of workers, L, used to produce that output

A

Average Product of Labor (APvL)

APvL = q/L

35
Q

To find out if output will rise in proportion to extra labor

A

Average Product Per Worker

36
Q

Explains how firms make decisions about production processes, types of inputs to use, and the volume of output to produce

A

Economic Theory

37
Q

If a firm keeps increasing an input, holding all other inputs and technology constant, the corresponding increase in output will become smaller eventually

A

The Law of Diminishing Marginal Returns

aka

Diminishing Marginal Product

*total return can still rise

38
Q

As the amount of labor used grows large enough, the marginal product curve becomes

A

Nearly Flat

39
Q

Extra labor causes total output to fall

A

Diminishing Returns

40
Q

The firm has more flexibility in how it produces and how it changes its output level when all factors can be varied

A

Long-Run Production

41
Q

Firm can substitute one input for another while continuing to produce the same level of output

Ex. Produce 400 planks of wood using 10 people with hand saws, 4 people with handheld power saws, or 2 people with bench power saws

A

Long-Run Production

42
Q

A curve that shows the efficient combinations of labor and capital that can produce a single level of output (quantity)

A

Isoquant

q=f(L,K) where q has bar over it because output is held constant

43
Q

The further an isobutane is from the origin, the ______ the level of output

A

Greater

The more input it uses, the more output it gets if it produces efficiently

44
Q

Do isoquants cross?

A

No

If they cross then the firm is producing inefficiently

45
Q

Isoquants slope ____

A

Downward

If it slopes upward that means it can produce same output with less input (inefficient)

46
Q

Slope of an isoquant

A

Marginal Rate of Technical Substitution (MRTS)

47
Q

What does an isoquant curve show?

A

How readily a firm can substitute one input for another

48
Q

Most isoquant slope (upward/downward), are (convex/concave), curve (towards/away) from origin and lie between _____ and _____

A 
Downward
Convex
Away
Perfect Substitutes (straight diagonal lines)
Non Substitutes (right angles)
49
Q

The number of extra units of one input needed to replace one unit of another input that enables a firm to keep the amount of output it produces constant

A

Marginal Rate of Technical Substitution (MRTS)

50
Q

The slope of an isoquant is (positive/negative)

A

Negative

51
Q

Firm can produce a given level of output by substituting more capital for less labor (or vice versa)

A

Marginal Rate of Technical Substitution (MRTS)

52
Q

Tells us how much a firm can increase one input and lower the other while still staying on the same isoquant

A

Marginal Rate of Technical Substitution (MRTS)

53
Q

The decline MRTS (in absolute value) along an isoquant as the firm increases labor

A

Diminishing Marginal Rates of Technical Substitution

54
Q

The more labor and less capital a firm has, the harder it is to replace remaining capital with labor and the flatter the isoquant becomes

A

Diminishing Marginal Rates of Technical Substitution

55
Q

When don’t isoquants exhibit diminishing marginal rates of technical substitution?

A

When isoquants are straight lines

aka

Inputs are perfect substitutions

56
Q

When do you shift from one isoquant to another?

A

By increasing one input while holding the other input constant

57
Q

How the ratio of output to input varies with the size of the firm is an important factor in determining the size of a firm

A

Returns to Scale

58
Q

Property of a production function whereby when all inputs are increased by a certain percentage, output increases by that same percentage

A

Constant Returns to Scale (CRS)

59
Q

Property of a production function whereby output rises more than in proportion to an equal increase in all inputs

A

Increasing Returns to Scale (IRS)

60
Q

If doubling inputs more than doubled the output

f(2L,2K) > 2f(L,K)=2q

A

Increasing Returns to Scale (IRS)

61
Q

Property of a production function whereby output increases less than in proportion to an equal percentage increase in all inputs

f(2L,2K)

A

Decreasing Returns to Scale (DRS)

62
Q

Production function where the returns to scale are the same at all levels of output

A

Cobb-Douglas

63
Q

The amount of output that can be produced with a given amount of inputs varies across firms and over time

A

Productivity and Technical Change

ECO 302 (4 decks)

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