Chapter 9: Concepts/ Theory Flashcards
Isoquant
curve showing all possible combinations of inputs physically capable of producing a given fixed level of output
Isoquant map
a graph showing a group of isoquants
Marginal rate of technical substitution (MRTS)
rate at which input is substituted for anything for another along an isoquant
change in K/ change in L= MPl/MPk
Isocost curve
line that shows the various combinations of inputs that may be purchased for a given level of expenditure at given input prices
C= wL+rK
K= c (held constant)/r - (w/r)L
The MP approach to cost minimization
MRTS= MPl/MPk= w/r
MPl/w=MPk/r
What equation to use for the case that 2 variables are given and the firm wishes to maximize output for a given cost
MRTS= w/r
Expansion path
curve or line of points that shows the cost minimizing input combinations for each level of output with the input/ price ratio held constant
Long run average cost (LAC)
LR total cost (LTC) divided by output
LAC=LTC/Q
Long run marginal cost (LMC)
change in LTC/ change in output (Q)
Economies of scale
occurs when LAC falls as output increases
Diseconomies of scale
occurs when LAC rises as output decreases
Constant costs
neither economies of scale nor diseconomies of scale occur, thus LAC is flat and equal to LMC at all output levels
Minimum efficient scale (MES)
lowest possible level of output needed to reach minimum LAC
Economies of scope
occurs when the joint cost of producing two+ goods in less than the sum of the separate costs of producing the goods
Multiproduct total cost function
LTC(X,Y)
gives the lowest TC for a multiproduct firm to produce X units of one good and Y units of another good
When does economies of scope occur?
joint products
combination or shared inputs
Purchasing economies of scale
large buyers of inputs receive lower input prices through quantity discounts, causing LAC to shift downward at the point of discount
Learning/ experience economies
when cumulative output increases causing workers to become more productive as they learn, LAC shifts downward as a result
SR expansion path
horizontal line showing the cost minimizing input combinations for various output levels when capital is fixed in the short run
