Production Flashcards
Where does profit maximisation happen?
MC = MR
How do you maximize profits?
TR - TC
What is a production function?
Tells us how much output a firm can produce for different levels of inputs
Y = F(K,L)
What is the marginal product?
Describes how the level of output increases when the level of input increases, holding all other inputs fixed
How do you derive the marginal product?
MPl/MPk - like the marginal utility from consumer theory
What is returns to scale?
Describes how output increases when the levels of all inputs increase, simultaneously
What happens when you double labor and capital?
Output doubles - constant returns to scale
Output less-than-doubles - decreasing returns to scale
Output more-than-doubles - increasing returns to scale
What is an example of constant returns to scale?
Something that can be replicated separately, like retail franchising
What is an example of increasing returns to scale?
Something that feeds on itself, like R&D
What is an example of decreasing returns to scale?
Something that exhausts resources, like mining
What is the total cost function?
Tells us the lowest possible expenditure that the firm can incur to product any given level of output
What is the total cost function?
min rK + wL (+fixed costs)
How do you calculate TFC?
Put q=0
How do you calculate TVC?
Difference between TC and TFC
How do you calculate AVC?
TVC/q
How do you calculate ATC?
TC/q
How do you calculate MC?
Cost of producing 1 more unit so derive TC/q
Why does AFC always decrease?
Fixed costs get spread over more quantity
Why does MC intersect at the minimum of AVC?
When the next unit costs more than the previous ones, it pulls the average up
How do you solve for minimum cost in the long run?
Reach the lowest isocost line that touches the isoquant
What should you know about isoquants?
They are decreasing because if you use more labour, you can use less capital to keep output constant
What are isoquants?
These curves are often convex so the slope flattens because of decreasing marginal product
What is the MRTS?
The slope of the isoquant
What is the isocost line?
Tells us how much K,L cost
It is a straight line on the K,L graph
What is the slope of the isocost line?
It is -w/r
What is the solution to the cost minimisation problem?
It is the tangency point between the isoquant and the isocost curve
What is optimality?
An additional dollar spent on labour yields the same output as an additional dollar spent on capital
