Chapter 8 - Producers in the long run Flashcards
Technical efficiency def
output/physical amount of all inputs (concerned about amount)
Economic efficiency def
output/value of the inputs (looking for most efficient comb of labour/capital)
Maximal profits go with minimal ______
costs
When is cost minimized
MPk/pk = MPL/pL (marginal product from capital divided by capital price = marginal product from labour divided by labour price)
Principle of substitution explanation
Firms adjust quantities of the factors of production in response to their changing relative prices
when firms use principle of substitution, we can say that they are changing their ______
methods of production
What is LRAC and what we see on it (2)
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
LRAC shape and 3 regions
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)
Why LRAC decreases in the beginning
Specialization (of tasks)
Why LRAC ends up increasing when level of output gets high (2)
1) Difficulties of managing
2) Less efficient labour (alienation of the labour force)
Important point on the LRAC curve
Qm : Minimum efficient Scale : Smallest level of output at which LRAC reaches its minimum
Decreasing returns to scale (LR) is _________ as diminishing marginal returns (short run) (reminder : point of diminish returns)
not the same !
What may happen to firm when output > Qm
possible increase in cost and decrease in returns to scale
What are returns to scale
How output of a business responds to change in factor inputs
When are there increasing returns to scale ?
% change in output > % change in inputs
When are there decreasing returns to scale ?
% change in output < % change in inputs
When are there constant returns to scale ?
% change in output = % change in inputs
What is SRATC curve and what is the relationship between LRAC and SRATC curves
short run average total cost. All SRATC curves are tangent to the LRAC curve
What each SRATC curve tangent to the LRAC curve represents
a fixed capital
What is particular about the point where a SRATC curve is tangent to the LRAC curve
It is the level of output where the firm considers optimal to use K = … (the fixed capital for this SRATC curve)
Important thing about tangent point of SRATC curve on LRAC curve and who discovered that
Jacob Viner : SRATC curve isn’t necessary tangent to the LRAC curve at its minimum
2 possible shifts of the LRAC curve and their explanation(s)
1) Upward shift : rise in factor prices
2) Downward shift : technological improvement or fall in factor prices
Very long run def
Length of time for a technological change
What technological change refers to
changes in available techniques of production
What is productivity
notion that is used to measure the extent of technological change
link that economists do between productivity and living standards
They believe that productivity growth (driven by technological change) is primary cause of rising material living standards over decades/centuries
Causes of productivity growth (3) and their explanation
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)
Policies to increase productivity growth (3) and their explanation
1) Policies to boost investment in new physical capital
2) Increase quality of workforce
3) Promoting technological improvements
how policies can boost investment in new physical capital
reducing taxes = higher return expected with investment
how policies can increase quality of workforce
reduce income tax or direct funding of education
how policies can promote technological improvements
tax policies and regulatory policies (patents - patent = brevet)
Changes in technology are often ________________ to changing economic signals
endogenous responses
3 kinds of changes in the very long run
1) New techniques - Process innovation
2) New inputs
3) New products - Product innovation
What is substituting away
Faced with input’s increasing price, firm changes its production technique within the confines of existing technology
What is innovating away
Faced with input’s increasing price, firm develops new production techniques
Pros and cons of investment in developing new production techniques
risky but more effective techniques could allow firm to maintain an advantage over its competitors
