Chapter 7 : Production in the Short Run Flashcards
types of firms (6)
- Single proprietorship
- Ordinary partnership
- Limited partnership
- Limited liability partnership (LLP)
- Corporations (limited liability) (private and public)
- State-owned enterprise (Crown corporations)
- Non-profit organizations
Describe the single proprietorship
1 manager, reponsible for all aspects of his business (debts included).
Describe the ordinary partnership
Two or more joint owners.
They are each responsible for all of the partnership’s debts.
Include the startups.
Describe the limited partnership
There can be 2 types of partners:
- General partners : take part in the running of business and are liable for debts
- Limited partners : no part in the running of the business, and liability limited to the amount invested in the enterprise.
Describe the limited liability partnership (LLP)
Every partner has limited liability.
Describe the limited liability corporation (LLC)
The firm has its own identity.
The owners are not responsible for the things done in the name of the firm, but the directors might be
Distinguish between private LLCs and public LLCs
Private : their shares are not traded on the stock exchange
Public : their shares may be traded on the stock exchange.
Describe the state-owned enterprise
We call them Crown corporations in Canada
- Owned by the government
- Similar organization and legal status as a corporation
- Under the direction of a ± independent board.
Ex. VIA train rail in Canada
Describe non-profit organizations.
Their explicit objective is to provide foods and services (sold or for free).
The profits generated remain within the organization, are not claimed.
They earn revenues through a combination of sales and donations.
Ex. YMCA
What type of firm (public or private) dominates the market?
Private type firms.
What do we call the money a firm raises from carrying on its business?
A financial capital.
It is distinct from the physical capital, firm’s assets, which are factories, machinery, offices and fleets of vehicles.
2 types of financing capitals of firms
- Equity
- Debt
Describe the equity-type of Financial capital.
One or + owners provide much of required funds, often in exchange of stocks, share of equities (in the case of Corporations).
Profits that are paid out to the shareholders are called dividends.
What is a dividend?
The profit paid out to shareholders.
Describe the debt-type of financial capital
The firm’s creditors are not owners, the loan is done with an agreement or an IOU.
Firms are obligated to pay the principal and the interest.
Where can firms borrow money from?
-Financial institutions
-Non-bank lenders using debt instruments or bonds
2 assumptions we make about firms in the course
- Profit maximization
- Each firm is a single, consistent decision-making unit.
What to consider in the question of : Is it Responsible for firms to maximize profits?
- Does it serve the broader public’s interest?
- Does it benefit the costumers and the employees, and lead to innovations, which improve living standards?
Other things to consider: environment, market structure, government intervention
Describe the production function rule
Q = f(K,L)
Q = flow of output
K = flow of capital services
L = flow of labour services
These are the 2 main inputs we consider.
What are the 4 types of inputs for production that a firm uses?
- Inputs that are outputs from some other firm (intermediate inputs)
- Inputs provided by nature
- Inputs that are the services of labour
- Inputs that are the services of physical capital.
The last 2 are the ones we consider in the calculs.
Is production a flow or a stock concept?
It is a flow concept.
What does the production function show?
It shows the maximum output that can be produced by a combination of inputs
It describes the technological relationship between the inputs that a firm uses and the outputs that it produces.
True or False? A change in technology means a change in the production function.
True. Example with a company which requires some machinery and a lot of people VS company with only machinery.
Definition of explicit cost and what they include.
The purchase of goods and services by a firm.
It includes hiring workers, the rental of equipment, the interest payments on debt, the purchase of intermediate inputs.
Depreciation is also included in the explicit cost.
Accountants care only about explicit costs.
What is depreciation?
It is a cost arising due to the wearing out of physical capital. It is not a market transaction.
Accounting profits equation
Accounting Profits = Revenues - Explicit costs
How do we calculate the revenues of a firm?
The Price x the Quantity (P x Q)
What are implicit costs?
The costs of items that don’t require transactions but that are still an opportunity cost.
They include: the opportunity of cost of the owner’s time and of his capital.
Economists care about both implicit and explicit costs.
Economic profit equation
Economic profit = Revenue - (Explicit Profit + Implicit Profit)
or
Economic profit = Accounting profit - Implicit cost
When we talk about profit, do we refer to the economic or the accounting profit?
We refer to the economic profit.
Is depreciation included in the explicit or the implicit costs?
Explicit.
Symbol for the economic profit
Pi.
Pi = TR - TC
3 time horizons for decision making
- Short Run
- Long Run
- Very Long Run
Define the short run of production
Time period in which the qt of some inputs, called fixed factors, cannot be changed.
What is the fixed factor?
Usually an element of the capital, but might be land, services of management, supply of skilled labor
Define the variable factors?
The inputs that can vary, even in the short run
Define the Long Run of production
The period over which all inputs may vary, except for technology.
Define the very long run.
The period of time where everything, including technology, can vary.
What do we change in the function of the Short Run, and what is fixed?
We fix f and K, and we change L.
(Q = f(K,L))
Define the TP and the AP
TP : Total product. Amount produced in a period of time. (“Q” in the production function)
AP : Average product. TP divided by the # of units of the variable factor used to produce it (L).
AP = TP/L
What is the marginal product? Equation?
Change in total output (TP) that results from using one more unit of a variable factor.
MP = deltaTP /deltaL
What is the law of diminishing returns?
Law that states that if increasing amounts of a variable factors are applied to any qt of a fixed factor, eventually a situation will be reached in which the marginal product of the variable factor declines
True or False? Each successive amount of variable factor has less and less of fixed factor to work with.
True, this explains the law of diminishing returns.
Explain the slope of the TP curve in function of the variable factor
Because of the law of diminishing returns, eventually there is a point where more of the variable factors decreases the marginal product, therefore leading to a smaller and smaller augmentation of the total product.
Describe the slopes of the MP and the AP curves in relation to the amount of variable factor
MP : diminishing returns means theres less and less returns after a certain point, explains the triangular shape.
AP : at a point, since the additional input starts producing less and less TP, the curve diminishes.
At what point do the AP and MP curves intersect?
Explain why the MP curve is above the AP at point 3 of the X axis
MP > AP because the additional input will generate more additional output than the current average output
It will increase the average.
Explain why the AP is above the MP curve at this point.
Because the additional variable input generates less than the current average product, which drags down the average curve.
At what point is the AP = MP?
When the average peaks.
Total costs equation
TC = TFC + TVC
(total cost = total fixed cost + total variable cost)
Average cost equation
ATC = AFC + AVC
(average total cost = average fixed cost + average variable cost)
What is marginal cost? What is its equation?
Marginal cost (MC) : increase in total cost resulting from increasing the output by one unit.
True or False? Marginal costs are always Marginal variable costs.
True. This is because the fixed costs do not change as output varies.
Is the AVC line U-Shaped or linear?
It is U-Shaped
Is the AFC U-Shaped or linear?
It is linear.
Is the ATC U-Shaped or linear?
U-Shaped.
Is the MC curve U-Shaped or linear?
U-Shaped.
When does the MC curve cross the ATC and the AVC curves?
At their minimum.
When MC is below AVC, AVC diminishes.
When MC is above AVC, AVC augments.
What is capacity?
The largest amount of output that can be produced without encountering a rise in the average costs per unit.
It is the level of the output that corresponds to the minimum of the ATC
When does a firm have excess capacity?
When it produces output at a point below the minimum average total cost.
