Chapter 7: Producers in the Short Run Flashcards
What are the four types of inputs firms use for production?
Intermediate inputs Inputs provided directly by nature (land) Services of labour Services of physical capital (machines/facilities)
What is an intermediate input?
Inputs that are outputs from some other firm eg electricity
What is a production function?
The function which shows the maximum output that can be produced by any given combination of inputs Q = f(L,K)
How are profits calculated?
Profit = Total Revenue - Total Costs
How are accounting profits calculated?
Accounting Profits = Total Revenue - Explicit Costs
How are economic profits calculated?
Economic Profits = Total Revenue - (Explicit + Implicit costs) pi = TR - TC
What are explicit costs?
The hiring of workers, the rental of equipment, interest payments on debt, the purchase of intermediate inputs
What are implicit costs?
The opportunity cost of the owner’s time and the opportunity cost of the owner’s capital
When referring to a firm’s profit, we always refer to mean _____ profit
economic (Total revenue - Explicit - Implicit costs)
What is a fixed factor?
An input that does not change in the short run Usually an element of capital but could be land, services, etc)
What are variable factors?
Inputs that are not fixed and can be varied in the short term
What is the long term?
The length of time over which all of the firm’s factors of production can be varied but its technology is fixed
What is the difference between the long run and the VERY long run?
Technology can be varied
What is total product?
The total amount produced during a given period of time
What is average product?
The total product divided by the number of units of the variable factor used to produce it AP = TP / L Where L is number of units of labor
What is the marginal product?
The change in total output that results from using one or more unit of a variable factor MP = deltaTP/deltaL
According to the law of diminishing returns: as more workers are added to a production process, each can specialize in one task, and the workers’ marginal product initially _____ BUT If there is a fixed amount of physical capital, eventually the marginal product is likely to ___
Rises Fall
When AP is in maximum: AP _ MP When AP is increasing: MP _ AP When AP is decreasing: MP _ AP
AP max: AP = MP AP inc : MP > AP AP dec : MP < AP
Ceteris Paribus - If increasing amounts of a variable factor are applied to a given quantity of a fixed factor, eventuall a situation will be reached in which the marginal product of the variable (increases/decreases)
What is a consequence of this?
Decreases
To increase the output, more and more of the variable factor must be given
This means each successive unit of the variable factor has less and less of the fixed factor to work with
Eventually equal increases in work effort begin to add less and less to total output
How do you calculate (Average) Total cost?
(Average) Total cost = [Average/Total] Fixed Cost + [Average/Total] Variable Cost
What is total fixed cost?
The cost of the fixed factor(s)
DOES NOT VARY with the level of output
eg annual cost for renting a factory
What is total variable cost?
The cost of the variable factors
Varies DIRECTLY with the level of output
eg Labour Costs, Material Costs
How do you calculate marginal cost?
MC = delta(TVC)/delta(Q)
since
MC = delta(TC)/delta(Q) = delta(TFC)/delta(Q) + delta(TVC)/delta(Q)
NB delta(TFC)/delta(Q) = 0 because TFC does not change with the level of output
What is the shape of the ATC Curve?
“U Shaped”
When does the Marginal Cost curve intersect with the ATC, AVC and AFC curves?
At their minima
Each additional worker adds (the same amount/different amounts) to the total cost but (the same amount/different amounts) to total output
Same
Different
As AP rises, AVC is (rising/falling)
Falling
When is AVC at its minimum?
When AP reaches its maximum
What does a diminishing Marginal P`rice of variable factors imply?
An eventually rising Marginal Cost
When does MC reach its minimum?
When MP reaches its maximum
How is a firms capacity defined?
The level of output that corresponds to the minimum short-run ATC
The largest output that can be produced without encountering rising average costs per unit
What happens when a firm has excess capacity?
A firm produces at an output that is less than the point of minimum ATC
