L4 Flashcards
What are the three building blocks for production decision of a firm
- Production technology
How inputs can be transformed into ‘outputs’. - Cost-constraints
Firm is concerned about prices of inputs i.e. , about production cost (like, budget). - Input choices
Given production technology and the prices of inputs, the firm decides how much of each input to use.
What does factors of production mean?
Any inputs required for produce outputs. Ex, we need medical staff and a hospital building for producing out-patient care, inpatient care, surgery etc
What is production function
It indicates highest output (q) that a firm can produce for every specific combination of inputs
what is the difference between short and long run for a firm?
In the short run at least one factor must be fixed, for example the hospital building can’t be changed but on both cases the number of staff
what is the total production curve?
It shows how cumulative products change along increase in inputs
What is the relation between average and marginal product curve?
When the marginal product is greater than the average product, the average product is increasing or vice versa
What is the relationship between AP and MP
AP increases as long as MP increases. AP starts to fall when MP starts to getting lower. MP gets negative values beyond the highest point at TP curve.
What is the law of diminishing marginal return
The law of diminishing returns states that as the use of an input increases in equal increments (with other inputs fixed), a point will eventually be reached at which the resulting additions to output decrease
What is a isoquant curve?
An isoquant is a curve that shows all possible combinations of inputs that yields the same output
What is MRTS, what does it stand for?
Marginal rate of technical substitution.
Amount by which the quantity of one input can be reduced when one extra unit of another input is used, so that output remains constant
What is meant by “return to scale”, name the three types
Rate at which output increases as inputs are increased proportionately.
1. Increasing return to scale (IRS)
- Outputs get more than double when inputs are doubled
2. Constant return to scale (CRS)
- Outputs get double when inputs are doubled
3. Decreasing return to scale (DRS)
- Outputs get less than double when inputs are doubled
What is the accounting cost?
The actual expenses plus depreciation charges
What is the opportunity cost?
Cost associated with opportunities that are foregone when a firm’s resources are not put to their best alternative use
What are fixed and variable cost?
Fixed cost - A cost that does not vary with the level of output and that can be eliminated only by going out of business.
Variable cost - A cost that varies with level of output. Example, cost of medicine for patients.
What is marginal cost?
Increase in cost resulting from the production of an extra unit of output.
