Cost Minimisation Flashcards
What is production in the context of cost minimisation?
Changing one group of things into something else; any process that converts a set of inputs to outputs.
Define the production function.
A relationship that shows how the quantity of outputs changes in response to varying quantities of inputs.
What does Total Physical Product (TPP) represent?
Total output produced.
How is Average Physical Product (APP) calculated?
Total output divided by total input.
What does Marginal Physical Product (MPP) measure?
Change in TPP divided by change in Labour; additional output gained from adding one unit of input.
What does the Total Product Curve (TPC) illustrate?
How changing one input affects the total output, with all other inputs remaining fixed.
Define efficiency in the context of production.
Achieving the maximum output possible from a given set of inputs.
What is X-inefficiency?
When a producer fails to obtain the maximum output possible from a given set of inputs and technology.
What causes technical inefficiency?
Due to the choice of production methods (technology).
What is economic inefficiency?
When a producer does not use the least-cost combination of inputs to produce a certain level of output.
What is the goal of cost minimisation?
To produce a given level of output at the lowest possible cost.
What does an Isoquant Curve represent?
Different combinations of two inputs that produce the same level of output.
What is the Marginal Rate of Technical Substitution (MRTS)?
Change in Y divided by change in X; the slope of the isoquant curve.
What does an Isocost Curve show?
Combinations of inputs that cost the same amount.
What is the equation for the isocost curve?
S = (wxL) + (rxk).
What do the variables in the isocost curve equation represent?
- S - total spending on the two inputs
- wxL - spending on Labour (wages x units of labour)
- rxk - spending on capital (price of capital x units of capital).
At the cost minimising point, what is true about MRTS?
MRTS equals the price ratio of the two inputs.
What does it mean to be economically efficient in production?
Using the least-cost combination of inputs to produce a certain level of output.
