L3 Firms And Production Flashcards
Firm
Organisation that converts inputs into outputs
Private sector
Firms owned by individuals or other nongovernmental entities whose owners try to earn a profit
Public sector
Firms owned by gov or gov agencies
Non profit
Not gov owned and not intended to earn profit
Sole proprietorships
Firms owned and run by one individual
General partnerships
Businesses jointly owned and controlled by 2 or more people operating under a partnership agreement
Limited liability
Personal assets of owners cannot be taken to pay debts even if it goes bankrupt
Objectives of firms
Maximise profit
In order to do so, firm must produce as efficiently as possible
They do this if they can produce its current level of output with fewer inputs, given existing knowledge about tech and organisation of production
Firm uses teach of production process to transform inputs or FoPs into outputs
Factors of production
Capital (K) long-lived inputs
Labour (L) human services
Materials (M) raw goods and processed products
Production function
Relationship between the quantities of inputs used and the max quantity of output that can be produced given current knowledge about tech and organisation
Short run
Period of time so brief that at least one FoP cannot be varied practically
Fixed input
FoP that cannot be varied practically in the SR
Variable input
FoP whose quantity can be changed readily by the firm during the relevant time period
Long run
Lengthy enough period of time that all inputs can be varied
Total product
Amount of output that can be produced by given amount of labour
Marginal product
Change in total output resulting from using an extra unit of labour, holding other factors constant
Average product
Ratio of output to number of workers used to produce that output
Law of diminishing marginal returns
If a firm keeps increasing an input, holding all other inputs and tech constant, the corresponding increases in output will become smaller eventually
Marginal product of the input will diminish eventually
Isoquant
Curve that shows the efficient combinations of labour and capital that can produce a single level of output
Properties:
1. Farther an isoquant is from origin, greater level of output
2. Isoquant do not cross
3. Isoquants slope downwards
Marginal rate of technical substitution
How many units of capital the firm can replace with an extra unit of labour while holding output constant
Change in capital over change in labour
Technical progress
Advance in knowledge that allows more output to be produced with same level of inputs
Neutral technical change
Firm can produce more output using the same ratio of inputs
Non neutral technical change
Innovations that alter the proportion in which inputs are used
