Producer Theory Flashcards
How can a Production function be denoted as?
q = f(K,L)
How can we define a Production Function?
It describes the maximum output, q, that a firm can produce efficiently with a given combination of capital and labour, {K, L}, conditional on the firm’s current
technology and organisation.
What is the Short Run defined as?
Defined as the period in which a firm is unable to change the level of at least one factor of production.
- Generally capital (K bar) Bar is the line on top
- Could be labour (But not considered)
What is the Short Run production function?
q = f (K bar, L).
What is the Marginal Product of Labour?
MPL, is the increase in output that results
from an extra single unit of labour, holding all else constant.
- It is characterised by the gradient of the short run production function.
How do we denote the MPL?
MPL = ∂q/∂L = ∂f(K bar, L)/∂L
What is the Average Product of Labour?
APL, is the ratio of output to the number of
labour units employed.
How do we denote the APL?
APL = q/L = f(K bar,L)/L
How do we denote Fixed Costs in the Short Run?
Fixed Costs - F
How do we denote Variable Costs in the Short Run?
VC(q)
How do we denote Total Costs in the Short Run?
C(q) = F +VC(q)
How do we denote Marginal Costs in the Short Run?
MC(q) = dC(q)/dq = dVC(q)/dq
When does the Marginal Cost denotation change?
When capital is fixed in the SR and when wages, w, are constant, then
VC(q) = wL(q), where L(q) is the labour require to produce q units of output.
What does the Marginal Cost change to when Capital is fixed in the SR and when wages are constant?
(USE THIS)
Then MC(q) = dVC(q)/dq = W dl/dq = w (1/dq/dl) = W(1/MPL) = w/MPL
So the marginal cost is w(1/MPL)
Why is the Marginal Cost w(1/MPL)?
because of the following: MPL is the number of units of output generated from an extra unit of labour.
Therefore, to generate one extra unit of output, the firm needs (1/MPL) units of labour.
How do we denotes Average Fixed Costs?
AFC(q) = F/q
How do we denote Average Variable Costs?
AVC(q) = VC(q)/q
How do we denote Average Costs?
AC(q) = C(q)/q = (F+VC(q))/q
= AFC +AVC
What is the AFC dependant on?
The AFC is strictly falling with output
Why is the Average Cost Curve U shaped?
Average variable costs may decrease with output but then begin to increase
with output for larger levels of output when diminishing marginal returns set in.
What is the difference between the Long Run and the Short Run?
In the long run, firms are free to select any level of capital and labour. (To study this use Isoquants)
In short run Capital is fixed
What do Isoquants describe?
Isoquants describe the possible combinations of factors (labour and capital) that, when used efficiently, generate a given level of output;
f (K, L) = q bar
-Often assumed to have similar properties and similar shape to Indifference Curves
SEE GRAPH IN NOTES
What are the assumptions that the properties of Isoquants follow from?
The properties of isoquants follow from the assumptions that:
i) the firm uses the factors efficiently and that,
ii) the marginal product of both factors is always positive.
What are the Properties of Isoquants?
- Output increases with distance from origin
- Isoquants cannot cross
- Isoquants are downward sloping
- Isoquants cannot be ‘thick’
- Isoquants are convex to the origin.
