Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Econ of Firm Comp > Lec 2 - Theory of Firm > Flashcards

Lec 2 - Theory of Firm Flashcards

1
Q

What is a Firm?

A

Black Box
= a production function (technology = efficency) (containing same info as the cost function), which maps inputs into outputs
= Also gives max output that firm can achive with given input: “Frontier”

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What does the Cost Function tell?

Visualize the Graph! (Cost <=> q)

A

The Total Cost (or minimum) for producing a certain Quantity
or a Quantity produced for a Certain Cost
=Efficiency!
= How much input a firm needs for a certaion output

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What does the Product Curve show?

Visualize the Graph! (Q <=> Labor)

A

Production amount for a given amount of Labor

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What does Total VC Curve and Total Product Curve have in relationship?

Visualize the Graph!

A

They are exact reflections of each other

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What are Fixed Costs F?

A

Expense that is paid once and does not depend on how many units of output are produced
Can be either SUNK or AVOIDABLE Costs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are Variable Costs VC?

A

Expense that depends on the amount of output

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What are Total Costs C?

A

Total of Fixed Costs and Variable Costs
C = F + VC,
If q is the amount of Output, then:
C(q) = F + VC(q)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is the Marginal Cost MC(q)?
How is it calculated?
Visualize the Graph! (MC <=> q)

A

The cost of producing one additional unit
Derivative of the Cost Function with respect to Quantity
MC(q) = dC(q) / dq

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What are Average Costs?

A

Costs divided by q

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Name 3 main Average Costs and their calculation!

Visualize their Graphs! (Costs <=> q)

A 
AFC(q) = F / q
AVC(q) = VC(q) / q
ATC(q) = AFC(q) + AVC(q)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is the relationship between MC, AC and AVC?

Visualize their Graphs! (Costs <=> q)

What is the area beneath the MC curve up to q?

A

AVC decreases until a point (q) and then starts rising.
Up to the point q, all points on MC are lower than AVC. This means each unit costs less then the one before, so ATC are decreasing.
After this point, MC are higher than AVC, each additional unit is more expensive than the one before, so ATC are increasing.
MC and AVC cross eachother at q, where this point is the lowest poing ot AVC curve
q also corresponds to to the lowest point of AC curve, which is naturally above AVC.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is the Objective of a Firm?

A

To maximise profits

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is the most fundamental decision of a Firm?

A

How much to produce = quantity q to produce

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is the formula for Profit Maximisation?

A

Profits = Revenue - Costs : π = R(q) - C(a), so

max(q) π = R(q) - C(a)
Also:
max(q) π = q*p(q) - C(a)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

When are profits maximised?

A

When MR(q) = MC(q)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

When is a firm a Price-Taker?

Where does Price-Takers exist?

A

When the price that the firm receives does not depend on the quantity q
Or when it cant influence the price that it gets for its products

They exist in Competitive Markets

17
Q

What are some other Theories of the Firm?

What do all suggest?

A

Original: Maximise Profit
Others:
Maximise Sales Revenue
= Manager Salaries related to Sales Revenue, so Higher Output but Lower Profits
Maximise Growth
= Manager income related to Growth of the Firm, so Higher Output but Lower Profits (depending on profit constraints). Valuation of firm may fall, becoming a target of Takeovers. A Profit Constraint helps this issue.
Maximise Managerial Discretion
=Output & Profit somewhere between Profit Max and Growth Max, costs may increase
All Suggest
= A firm may be unable to maximise profits because managers may have different objectives than shareholders
=Principal-Agent Problem!

18
Q

What is the neoclassical theory of the firm?

A

The theory of the firm is a microeconomic concept that states that a firm exists and make decisions to maximize profits

19
Q

What are the Problems & Limitations of Theory of the Firm?

A

Ignores incentive problems within the firm (due to separation of ownership and control)

Says nothing about the internal organization of the firm (nothing about the hierarchical structure, how decisions are made, who has the authority within the firm)

Tells nothing about the boundaries of the firm

20
Q

What makes theory of the firm valuable?

A

Analytically tractable
Delivers testabel hypotheses
Starting point for “additional theories”

21
Q

What 2 factors guide decision making?

A

Technology and Taste

22
Q

Where does the price p(q) come from and how does it relate to demand?

A

p(q) reflects the preference of the buyers
=Willingness to Pay for q units of a good (WTP)
p(q) also varies with the q that a firm produces
These factors determine the demand!

23
Q

What is Direct Demand?

D(p) = a -bp
Visualize graph for a=6 and b=2 (Q <=> p)

A

D(p): shows how many units are demand at a given price p

24
Q

What is Inverse Demand?

A

p(Q): Shows the price such that the quantity demanded is Q

Shows how much the firm will be able to charge for each amount produced Q

25
Q

What is the price elasticity of demand?

A

% variation in quantity demanded by the % variation in price.
How strongly the q demanded changes with a given variation in price?

26
Q

What is Δp in terms of ΔQ for ε=1?

A

For ε=1, Δp= ΔQ

27
Q 
What are these called?
ε=0 
0<ε<1 
ε=1 
ε>1 
ε=∞
Visualize graphs for all! (p <=> Q)
A

ε=0 Perfectly Inelastic: Independently of the price, the same Quantity of Q will be demanded
0<ε<1 Inelastic: The change in Quantity will be lower than the change in price
ε=1 Elasticity equals to 1: The change in Quantity will be the same as the change in price
ε>1 Elastic: The change in Quantity will be higher than the change in price
ε=∞ Perfectly Elastic: A small change in the price will lead to a decrease of the demanded Quantity to zero

28
Q

Exercise: Interpret the meaning of the values of the inverse demand function at different quantities!

A

Price given by the inverse demand for a quantity is the consumer’s Willingness To Pay WTP per unit, if the consumer buys the amount of quantity.

29
Q

What do we mean by the “horizontal sum” of demands?

A

Horizontal sum means the process going from individual demand to market demand by adding them up. Horizontal as the demand (quantity) lies in the x axis.

30
Q

How do we algebraically find the minimum market price at which a firm would be willing to start producing?

A

MR = MC

The MC curve is the one necessary to figure out the price to produce
Other curve, AC is responsible for the entry decision

Finding the minimum of the curve gives the answer of the question. You derive the curve function.

FOC is not sufficient for an optimal solution, but we will not look at the second order condition and will stay with the FOC.

Econ of Firm Comp (9 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions