Chapter 7 - Producers in the short run Flashcards
6 types of firms
Single proprietorships, Ordinary partnerships, Limited partnerships, Corporations, State-owned (crown) corporations, Non-profit organizations
One other type of firms
transnational corporations (TNCs) or multinational enterprises (MNEs)
2 types of (financial) capital firms use
equity and debt
what is equity and what happens w/ firm profits
way to acquire funds from the owners. Synonym for stocks or shares. (actions). Profits may be distributed as dividends
how firm uses debt for financial capital
give bonds to lenders (of money). they will have to give them their money back with interest
who are the firm’s creditors
the lenders (not the owners)
2 key assumptions of economists about firms
1) Profit-maximizers
2) Assumed to be a single, consistent, decision-making unit
What firms must do aside maximizing profits
Become socially responsible
How can we respond to socially irresponsible firms (2)
1) Duty of gvt to set rules
2) Expression of consumers’ preferences in the market place
4 types of inputs firms use for production
1) Intermediate products
2) Inputs provided by nature
3) Inputs provided by people (such as labour services)
4) Inputs provided by services of physical capital (machines)
Production function
q = f(L,K) relation between labour/capital and output
production flow or stock
flow
Profits formula
Total revenue - Total cost
Accounting profits formula
Total revenue - Explicit cost
Economic profits formula
Total revenue - (Explicit + Implicit costs)
Implicit cost what it is
opportunity cost of the owner’s TIME and CAPITAL in the firm’s cost
what a positive economic profit means
Owner’s capital is earning more than it could in the next best alternative use
what an economic profit of zero means
Owner interested in continuing production
what a negative economic profit means
Owner must consider other options (capital not used to its best)
Firm’s economic profit formula
Pi = TR (total revenue) - TC (total cost)
What is TR (how do you find it)
q x p
What is TC (how do you find it)
explicit + implicit costs
what TR depends on
type of demand the firm faces
What TC depends on
Time horizons for decision making (will affect how firm can change capital and labour)
Short run def
Length of time over which some of the firm’s factors of production are fixed, generally capital is fixed in short run
Long run def
Length of time over which all factors of production of firm can vary but technology is fixed
Very long run def
Length of time over which all firm’s factors of prod. can vary and its technology can vary
Production function in the short run
q = f(L,K bar)
Total product
Amount of output produced in a certain period
Average product
AP = TP / L where L is labour or could also be another unit of the variable factor.
Marginal product
MP = ▲TP / ▲L (change in total product of one more unit of variable factor (labour)
Law of diminishing returns where it applies and what it is
Short run. If a variable factor is fixed, MP is likely to fall.
MP graph important point
Point of diminishing returns (maximum)
What is the point where average product crosses MP
Maximum point of average product
Total cost formula
TC = TFC + TVC
Average total cost formula
Total cost formula divided by Q –> ATC = AFC + AVC
what MC is
MC = ▲TC/▲Q
Increase in total cost resulting from producing one more unit of output
what part of TC changes in the short run
TVC
Shape of MC curve and why (2)
U-shaped. 1) Each worker costs the same. 2) When MP reaches its maximum, MC reaches its minimum
In terms of calculus what is MC
slope of TVC curve
what is the point where MC and AVC and what is the point where MC and ATC cross
minimum of ATC and AVC
behaviour of AFC curve and what this is called
AFC = TFC/Q Q increases so AFC decreases. It is called spreading the overhead
Distance between ATC and AVC curves with increasing output
Distance between the curves decreases with increasing output because it corresponds to AFC (and AFC decreases with increasing output)
relationship between AVC and AP
same as MC and MP. AVC reaches its minimum when MP reaches its maximum
What is a firm’s capacity (2)
1) Level of output that corresponds to the minimum short-run ATC
2) Largest level of output without encountering rising of average cost per unit
What is excess capacity
Firm that produces output less than the point of minimum ATC. (excess capacity cause capable of doing more)
what happens to MC and AVC when firm doesn’t use its capital to its maximum -possible even though capital is fixed- (machines not used to their maximum, less employees)
MC and AVC stay the same
ATC and MC curves change if price of variable factors changes
If price increases, ATC and MC increase. If price decreases, ATC and MC decrease
Additional curve concerning the TFC
There is a short-run cost curve for each given quantity of the fixed factor. Ex : cost of machines vs number of machines
