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ECONOMICS 11 > Module 5: Principles of Production and Costs > Flashcards

Module 5: Principles of Production and Costs Flashcards

1.Goal of the Firm 2. Total Revenue and Total Cost 3. The Production Function 4. The Various Measures of Costs 5. Cost Curves and their Shapes

1
Q

firms are willing to produce and sell a greater quantity of a good when the price of the good is higher. So that’s why you have your upward sloping supply curve.

A

LAW OF SUPPLY

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2
Q

the study of how firms’ decisions about prices and quantities depend on the market condition they face.

A

INDUSTRIAL ORGANIZATIONS

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3
Q

BEHAVIOR OF PROFIT MAXIMIZING FIRMS

A
  1. How much output to supply (quantity of product)
  2. How to produce that output (which production technique/technology to use)
  3. How much of each input to demand. (to create your output, you need to have a certain demand of your inputs to produce your outputs
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4
Q

key factor inputs

A

Your raw materials, your K which represents you capital and your L which represents your label

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5
Q

the annual flow of net income generated by an investment expressed as a percentage of the total investment.

A

Rate of return

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6
Q

the rate that is just sufficient to keep owners and investors satisfied

A

normal rate of return

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7
Q

earning more than is sufficient to retain the interest of investors

A

positive level of profit

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8
Q

when it incurs a loss, it is earning a rate below that required to keep investors happy.

A

negative level of profit

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9
Q

the production method that minimizes cost

A

Optimal method of production

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10
Q

Determines total revenue

A

Price of output

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11
Q

determines total cost and optimal method of production

A

production techniques and Input prices

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12
Q

total revenue minus total cost with optimal method

A

total profit

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13
Q

the firm is operating under a fixed scale (fixed factor) of production, and firms can neither enter nor exit an industry.

A

Short run

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14
Q

the period of time for which there are no fixed factors of production: firms can increase or decrease the scale of operation, and new firms can enter and existing firms can exit the industry. Over time, the cost spread out for long time

A

Long run

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15
Q

the quantitative relationship between inputs and outputs.

A

Production technology

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16
Q

Technology that relies heavily on human labor instead of capital

A

labor intensive technology

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17
Q

Technology that relies heavily on capital instead of human labor

A

Capital-intensive technology

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18
Q

where your marginal rate of technical substitution is equal to zero.

A

Neutral technology

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19
Q

a process through which inputs are combined and transformed into outputs

A

Production

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20
Q

amount of output that can be produced whenever you increase your labor. (additional product of an additional unit of worker.)

A

Marginal Product of Labor

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21
Q

the relationship between the quantity of inputs used to make a good and the quantity of output of that good.

A

Production function

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22
Q

The additional benefit you get from additional worker demonstrates a diminishing direction or rate.

A

true

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23
Q

When you add fixed cost and Variable Cost

A

Total cost

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24
Q

in production function, the curve gets ______ as the number of workers increases which reflects the diminishing marginal product.

A

flatter

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25
Q

shows the relationship between the quantity of output produced and the total cost of production.

A

Total-cost curve

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26
Q

in total-cost curve, when you continue to increase your production, given the increase of your total number of workers, the curve will get ______

A

steeper

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27
Q

the property whereby the marginal product of an input declines as the quantity of the input increases. (As more and more workers are hired, each additional worker contributes less to the production of cookies

A

Diminishing marginal product

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28
Q

The total cost gets ___ as the amount of product produced increases, whereas the production function gets _____ as production rises

A

steeper, flatter

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29
Q

the extra or additional cost, producing one extra unit of output.

A

Marginal Cost

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30
Q

it vary as output changes

A

Variable cost

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30
Q

expenses that must be paid even if the firm produces zero output.

A

Fixed costs

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31
Q

total cost divided by the quantity of output. TC/Q

A

AVERAGE TOTAL COST

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32
Q

the cost of a typical unit of output. Suppose the cost is divided evenly over all the units produced

A

AVERAGE TOTAL COST

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33
Q

Fixed cost divided by the quantity of output. FC/Q

A

AVERAGE FIXED COST

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34
Q

Variable cost divided by the quantity of output VC/Q

A

AVERAGE VARIABLE COST

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35
Q

The increase in total cost that arises from an extra unit of production. ΔTC/ΔQ

A

MARGINAL COST

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36
Q

When your output increases, your total cost ____

A

increases

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37
Q

your fixed cost is ____

A

fixed

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38
Q

your variable cost is ____

A

increasing

39
Q

In the average fixed cost, when you increase your output, the average cost ___

A

decreases

40
Q

average variable cost shows an ____ trend

A

increasing

41
Q

The average total cost ____ but it will have a turning point and will ____ after.

A

decreases, increase

42
Q

The marginal cost is constantly

A

increasing

43
Q

When the quantity of coffee produced is already high, the marginal product of an extra worker is low, and the marginal cost of an extra cup of coffee is large and vice versa

A

Rising Marginal Cost

44
Q

Average fixed cost always declines as output rises because the fixed cost it getting spread over a larger number of units.
Average variable cost usually rises as output increases because of diminishing marginal product.

A

U-Shaped average total costs

45
Q

the quantity of output that minimizes average total cost

A

Efficient scale

46
Q

When AVC increases, it will also make the decreasing AFC increase.
However, when AVC decreases, AFC will not make it increase, instead AFC will be the one who will decrease.

A

true

47
Q

Whenever marginal cost is less than average total cost, average total cost is falling. Whenever marginal cost is greater than average total cost, average total cost is rising

A

The relationship between marginal cost and average total costs.

48
Q

at low levels of output, marginal cost is below your average total cost. So your average total cost is falling. But after the 2 cost curves cross, marginal cost rises above your average total cost.

A

minimum of average total cost.

49
Q

In the long run, the firms gets to choose which short run term it wants to use. However, in the short run, it has to use whatever short run curve it has based on the decision it has made in the past.

A

true

50
Q

all the long run curves lie on or above your short run curve, these properties arise because firms have greater flexibility in the long run.

A

false, the short run curves lie on or above the long run curves

51
Q

a property whereby longer and average total cost falls as quantity of output increases

A

ECONOMIES OF SCALE

52
Q

a property whereby the long and average total cost rises as the quantity of output increases

A

DISECONOMIES OF SCALE

53
Q

a property whereby the longer and average total cost stays the same as a quantity of output changes.

A

CONSTANT RETURN TO SCALE

54
Q

increases the productivity of labor

A

Additional capital

55
Q

capital and labor are

A

complementary inputs

56
Q

Capital and labor are at the same time ___ and _____ inputs. Capital enhances the productivity of labor, but it can also be substituted for labor

A

complementary, substitutable

57
Q

If labor becomes expensive, firms can adopt _______; that is, they can substitue capital for labor.

A

labor-saving technologies

58
Q

Two things determine the cost of production

A

(1) technologies that are available
(2) input prices.

59
Q

it means equal or the same. It comes from a Greek word.

A

Iso

60
Q

it means quantity and cost.

A

Quant

61
Q

It means equal quantity and equal cost

A

Isoquant

62
Q

Isocost and Isoquants hinges on the notion of

A

not diminishing marginal returns

63
Q

States that adding an additional factor of production results in smaller increases in output.

A

Law of diminishing marginal returns

64
Q

A graph that shows all the combinations if capital and labor that can be used to produce a given amount of output

A

Isoquant

65
Q

It is always desirable to choose combinations of good X and good Y at the lowest.

A

false, highest

66
Q

the marginal output that one unit of worker can produce.

A

MARGINAL PRODUCT LABOR (MPL)

67
Q

the additional product that an additional capital can produce.

A

MARGINAL PRODUCT CAPITAL (MPK)

68
Q

Whenever you increase the number of capital you enjoy in your production, you are also _______ labor for capital

A

decreasing or substituting

69
Q

The ratio of MPL to MPK

A

marginal rate of technical substitution (MRTS)

70
Q

It is the rate at which a firm can substitue capital for labor and hold output constant

A

marginal rate of technical substitution (MRTS)

71
Q

it refers to your utility, which is the 4th theory. it also refers to technical substitution because you’re actually referring to your neighbor and your capital.

A

Marginal rate of substitution

72
Q

(Wage/Price of the output) or (ΔTP/ΔL)

A

MPL

73
Q

(Rental price of capital/Price of output) or (ΔTP/ΔK)

A

MPK

74
Q

(-) MPL/MPK

A

ΔK/ΔL

75
Q

A graph that shows all the combinations of capital and labor that are available for a given total cost

A

isocost line

76
Q

they will hire additional capital and or labor as long as the marginal revenue of doing so exceeds the marginal cost.

A

MAXIMIZE PROFIT

77
Q

each of its input is equal to the marginal cost.

A

MARGINAL REVENUE

78
Q

MPL

A

W/P

79
Q

MPK

A

R/P

80
Q

MRTS vLK

A

-ΔK/ΔL

81
Q

Slope of Isoquant=MRTS v LK

A

MPL/MPK

82
Q

This indicates the rate at which additional units of labor (ΔL) can be substituted for fewer units of capital (-ΔK)

A

MRTSLK

83
Q

When much capital and little labor are used,

A

the marginal productivity of labor is relatively great and the marginal productivity of capital is relatively small

84
Q

Main properties of Isoquants

A

*Isoquants further from the origin represent greater levels of output.
*Isoquants slope downward.
*Isoquants never intersect.
*Isoquants tend to be convex; that is, bowed towards the origin

85
Q

indentifies all combinations of capital and labor the firm can hire for a given total cost

A

ISOCOST LINE

86
Q

a line representing equal total cost to the firm.

A

ISOCOST LINE

87
Q

whenever you exhaust one one factor of production, the other factor or the potential benefit that you can gain from the other factor of production is greater than the exhausted one.

A

true

88
Q

Only one input (labor) is variable and all other inputs are fixed.

A

Less unrealistic view

89
Q

refers to the total amount of output produced by the firm.

A

Total product (TP or Q)

90
Q

when a firm is earning an above-normal rate of return on capital.

A

positive level

91
Q

total revenue minus total cost

A
  • Profit
92
Q

Total cost (economic cost) includes

A

(1) out of pocket costs and (2) the opportunity cost of each factor of production, including a normal rate of return on capital.

93
Q

the additional output that an added unit of that input will produce if all other inputs are held constant.

A

marginal product of a variable input

94
Q

when additional units of a variable input are added to fixed inputs, after a certain point, the marginal product of the variable input will dicline.

A

law of diminishing returns

95
Q

costs that require an outlay of money by the firm

A

explicit costs

96
Q

cost that do not require an outlay of money by the firm

A

implicit costs

ECONOMICS 11 (4 decks)

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