Chapter 6 (Week 3) Flashcards
Firm
Organisation that converts inputs into outputs
Private sector (for profit private sector)
Consists of firms owned by individuals or other nongovernmental entities whose owners try to earn a profit
Public sector
Consists of firms and organisation that are owned by governments or government agencies
Nonprofit (not for profit sector)
Consists of organisations that are neither government owned nor primarily intended to earn a profit
Ownership of for profit firms
Firms in the the private sector have three primary legal forms of organisation
1. Sole proprietorship: firms owned by a single individual
2. Partnerships: businesses jointly owned and controlled by two or more people operating under a partnership agreement
3. Corporations: owned by shareholders, who own the firm’s shares.
- Each share is a unit of ownership in the firm
- Shareholders own the firm in proportion to the number of shares they hold
- Owners aren’t personally liable for a firm’s debts - limited liability, which means that the owner’s assets can’t be taken to pay a corporation’s debt
What owners want
Maximise profits and thus produce as efficiently as possible (MC = MR)
Inputs
Capital services (K): long-lived inputs and equipment
Labour services (L): hours of work provided by managers, skilled workers and less skilled workers
Materials (M): natural resources and raw goods and processed products that are used in producing the final product
Production function
The relationship between the quantities of inputs used and the maximum quantity of output that can be produced
- Q = f(L,K)
Short run
brief period that a firm can’t change all inputs
Capital is fixed
Fixed input and variable input
Fixed input: a factor of production that a firm can’t practically vary in the short run
Variable input: factor of production that a firm can easily vary all its factors of production
Long run
a lengthy enough period that a firm can vary all its factors of production and has no fixed inputs
Total product
total quantity of output produced by a firm
Marginal product of labour
The additional output produced as one of the inputs increases
Changes in output over changes in the number of workers
Marginal product of labour formula
MPL = change in quantity / change in labour
Average product of labour
the output per unit of labour - Change in output/number of workers
Average product of labour formula
APL = quantity / labour
Law of diminishing returns
Output will eventually decrease with every extra added unit of labour
Isoquants
curves that show the efficient combinations of labour and capital that can produce the same (iso) level of output (quants)
Have the same properties as indifference curves BUT:
Isoquant holds quantity constant
Indifference curves holds utility constant
Slope of the isoquants
MRTS = - MPL / MPK
MRTS: the 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
Always negative as isoquants slope downwards
Returns to scale
If, when all inputs are increased by a certain percentage, output rises by that same percentage, it shows constant returns to scale
If output rises more than in proportion to an equal percentage in all inputs, the production function shows increasing returns to scale
If output rises less than in proportion to an equal percentage in all inputs, the production function shows decreasing returns to scale
In Cobb-Douglas’ production function, the returns to scale are the same at all output levels
