Chapter 6: Production Flashcards
Why do firms exist
Firms offer a means of coordination, inputs and transform them into outputs and use factors of productions such as labour and materials
What is the production function
It shows the highest level of output that a firm can produce for every specified combination of inputs.
Distinguish between the short and long run
Short run is the period of time in which quantities of one or more production factors cannot be changed (fixed)
Long run is the amount of time needed to make all production input variable
Distinguish between average product and marginal product
Average product is output per unit of a particular input
Marginal product is the additional output produced as an input is increased by one unit
Explain the law of diminishing marginal returns
Principle that as the use of an input increases (with other inputs fixed) the resulting additions to output will eventually decrease
What is labour productivity
It is the average product of labour for an entire industry as a whole. Labour productivity can increase if there are improvements in technology.
What are isoquants
Is the curve showing all possible combinations of inputs that yield the same output
What is an isoquant map
A graph combining a number of isoquants, used to describe a production function
What does the slope of the isoquant show
How the quantity of one input can be traded off against the quantity of the other while output is held constant also called marginal rate of technical substitution
What does the case of perfect substitutes and the fixed proportions production function indicate
These two extreme cases of production functions show the possible range of input substitution in the production process
What is the fixed proportions production function
Production function with L-shaped isoquants, so that only one combination of labour and capital can be used to produce each level of output
What are returns to scale
Rate at which output increases as inputs are increases proportionately
What are the three different cases of returns to scale
- increasing returns to scale - situation in which output more than doubles when all inputs are doubled
- constant returns to scale - situation in which output doubles when all inputs are doubled
- decreasing returns to scale - situation in which output less than doubles when all inputs are doubled
What is the production theory
How businesses decide the quantities of outputs to produce in response to demand
What is the theory of the firm
Describes how firms make cost minimising production decisions with cost varying output
