Chapter 8 - Producers in the long run

Question 1

Technical efficiency def

Answer 1

output/physical amount of all inputs (concerned about amount)

Question 2

Economic efficiency def

Answer 2

output/value of the inputs (looking for most efficient comb of labour/capital)

Question 3

Maximal profits go with minimal ______

Answer 3

costs

Question 4

When is cost minimized

Answer 4

MPk/pk = MPL/pL (marginal product from capital divided by capital price = marginal product from labour divided by labour price)

Question 5

Principle of substitution explanation

Answer 5

Firms adjust quantities of the factors of production in response to their changing relative prices

Question 6

when firms use principle of substitution, we can say that they are changing their ______

Answer 6

methods of production

Question 7

What is LRAC and what we see on it (2)

Answer 7

Long-run average cost curve. 1) Least-cost method (minimum achievable cost for each level of output)
2) Seperation of unattainable and attainable cost levels, given technology and factor prices

Question 8

LRAC shape and 3 regions

Answer 8

U-shaped. 1) Falling LRAC (increasing returns to scale, decreasing costs) 2) Constant LRAC (constant returns to scale) 3) Rising LRAC (decreasing returns to scale, decreasing costs)

Question 9

Why LRAC decreases in the beginning

Answer 9

Specialization (of tasks)

Question 10

Why LRAC ends up increasing when level of output gets high (2)

Answer 10

1) Difficulties of managing

2) Less efficient labour (alienation of the labour force)

Question 11

Important point on the LRAC curve

Answer 11

Qm : Minimum efficient Scale : Smallest level of output at which LRAC reaches its minimum

Question 12

Decreasing returns to scale (LR) is _________ as diminishing marginal returns (short run) (reminder : point of diminish returns)

Answer 12

not the same !

Question 13

What may happen to firm when output > Qm

Answer 13

possible increase in cost and decrease in returns to scale

Question 14

What are returns to scale

Answer 14

How output of a business responds to change in factor inputs

Question 15

When are there increasing returns to scale ?

Answer 15

% change in output > % change in inputs

Question 16

When are there decreasing returns to scale ?

Answer 16

% change in output < % change in inputs

Question 17

When are there constant returns to scale ?

Answer 17

% change in output = % change in inputs

Question 18

What is SRATC curve and what is the relationship between LRAC and SRATC curves

Answer 18

short run average total cost. All SRATC curves are tangent to the LRAC curve

Question 19

What each SRATC curve tangent to the LRAC curve represents

Answer 19

a fixed capital

Question 20

What is particular about the point where a SRATC curve is tangent to the LRAC curve

Answer 20

It is the level of output where the firm considers optimal to use K = … (the fixed capital for this SRATC curve)

Question 21

Important thing about tangent point of SRATC curve on LRAC curve and who discovered that

Answer 21

Jacob Viner : SRATC curve isn’t necessary tangent to the LRAC curve at its minimum

Question 22

2 possible shifts of the LRAC curve and their explanation(s)

Answer 22

1) Upward shift : rise in factor prices

2) Downward shift : technological improvement or fall in factor prices

Question 23

Very long run def

Answer 23

Length of time for a technological change

Question 24

What technological change refers to

Answer 24

changes in available techniques of production

Question 25

What is productivity

Answer 25

notion that is used to measure the extent of technological change

Question 26

link that economists do between productivity and living standards

Answer 26

They believe that productivity growth (driven by technological change) is primary cause of rising material living standards over decades/centuries

Question 27

Causes of productivity growth (3) and their explanation

Answer 27

1) Growth in capital per worker (investment in new machinery and equipement)0
2) Growth in quality of workforce (better workers produce more)
3) Growth in technological knowledge (inventing new products, changes in ways of producing things)

Question 28

Policies to increase productivity growth (3) and their explanation

Answer 28

1) Policies to boost investment in new physical capital
2) Increase quality of workforce
3) Promoting technological improvements

Question 29

how policies can boost investment in new physical capital

Answer 29

reducing taxes = higher return expected with investment

Question 30

how policies can increase quality of workforce

Answer 30

reduce income tax or direct funding of education

Question 31

how policies can promote technological improvements

Answer 31

tax policies and regulatory policies (patents - patent = brevet)

Question 32

Changes in technology are often ________________ to changing economic signals

Answer 32

endogenous responses

Question 33

3 kinds of changes in the very long run

Answer 33

1) New techniques - Process innovation
2) New inputs
3) New products - Product innovation

Question 34

What is substituting away

Answer 34

Faced with input’s increasing price, firm changes its production technique within the confines of existing technology

Question 35

What is innovating away

Answer 35

Faced with input’s increasing price, firm develops new production techniques

Question 36

Pros and cons of investment in developing new production techniques

Answer 36

risky but more effective techniques could allow firm to maintain an advantage over its competitors