Final exam Flashcards
theory of the firm
explanation of how a firm makes cost minimizing production decisions and how its cost varies with its output
production decision steps
production technology
cost constraints
input choices
factors of production
inputs into the production process
production function
function showing the highest output that a firm can produce for every specified combination of inputs q=F(K,L) where K= capital and L= labor
short run
period of time in which quantities of one or more production factors cannot be changed
fixed input
production function that cannot be varied, usually capital
long run
amount of time needed to make all production inputs variable
average product
output per unit of particular input
total output (q)=
K+L
average product=
(q/L)
marginal product=
(change in q/ change in L)
law of diminishing marginal returns
principle that as the use of an input increases with other inputs fixed, the resulting additions to output will eventually decrease
labor productivity
average product of labor for an entire industry or economy as a whole
stock of capital
total amount of capital available for use in production
isoquant
curve showing all possible combination of inputs that yield the same output
marginal rate of technical substitution
amount quantity of one input can be reduced when an extra of the other is used to keep output the same
MRTS=
- change in K/ change in L
for a fixed output, q
fixed proportions production function
production function with L-shaped isoquants, so that only 1 combination of labor and capital can be used to produce each level of output
returns to scale
rate at which output increases as inputs are increased proportionately
increasing returns to scale
output more than doubles when inputs double
constant returns to scale
outputs double when inputs double
decreasing returns to scale
output less than doubles when inputs double
accounting cost
actual expenses plus depreciation, economists don’t care about this
economic cost
the cost of utilizing resources in production, costs relevant to production
opportunity cost
cost associated with opportunities that are foregone by not putting the firm’s resources to their best alternative use
economic cost=
opportunity cost
sunk cost
expenditure that has been made already and cannot be recovered
total cost
total economic cost of production
fixed cost
a cost that does not vary with the level of output and that can only be eliminated by going out of business
variable cost
a cost that varies as output varies
TC=
FC+VC
amortization
policy of treating a one time expenditure as an annual cost spread out over some number of years
marginal cost
increase in cost resulting from the production of one extra unit of output
MC=
change in VC/ change in q
and
change in TC/ change in q
average total cost=
TC/q
average fixed cost=
FC/q
average variable cost=
VC/q
