chp 7 Production &Costs Flashcards
Profit
Goal of firms is to max profits
profit=Total revenue-total costs
Max profit=min cost of producing
3 Categories of economic profit
Positive, losses, normal
Positive Econ Profits
super high, unexpected profits for firms in that industry, attract entrepreneurs and induce new firms to market
Econ. Losses Profits
negative profits, firms will consistently earn losses and leave market or industry
Normal Econ Profits
zero profit, no new firms will enter but old firms won’t be motivated to leave they make an accounting profit
Production Function
every firm has this, relationship between quantity of input used and q of output produced (efficient technology produces most output)
Two types of input
Fixed, variable
Fixed Inputs
inputs that can’t vary in quantity for a period of time ex physical capital (a classroom can eventually put in new seats but for NOW they are fixed with a certain # of seats)
period of time all inputs can vary =longrun
period of time at least 1 input is fixed=shortrun
Variable inputs
inputs that can vary in quantity ex. Labour (you can add shifts and employees to increase or decrease production)
Long run
Marginal Product MP
Change in total output as we change the number of variable inputs ex. if i hire another worker how much will my total output incr. or decr.
MP= change in Q / change in # of inputs
In Marginal Product if input is fixed…
variable inputs will have diminishing marginal product
Average Product AP
amount of output per input
AP= Q / # of input
AP MP relationship
MP>AP=INCRS AP
MP
Total Fixed Costs TFC
costs that do not vary with quantity of output produced ex loans, rent
Total variable costs TVC
Costs that do vary with quantity of output produced ex labour costs, raw materials
INPUT X OUTPUT
Total costs TC
TFC+TVC
Average Total Cost AVC
TC/Q
Average Fixed Costs AFC
TFC/Q
Average Variable Costs AVC
TVC/Q
Marginal Costs
Increase in total cost that arises from an extra unit of production
MC= Change in TC / Change in Q
Mc is slope of TC
MC AND ATC Relation
MCATC= INCR ATC
MIN ATC IS POINT OF EFFICIENT SCALE
LRAC
Long run average cost curve
efficient when Q is between Q1 & Q2 where firm is producing min LRAC (Q1)
Scale economics in the LR
different levels of output place firms on different points on their LRAC curve
Increasing Returns To Scale IRS
LR average total cost FALLS AS Q INCREASES
Firms can lower AC by increasing output
Left side of decreasing LRAC
