Production Flashcards
Isoquants
Record alternative combinations of inputs that can be used to produce a given level of output
Marginal rate of technical substitution (RTS)
RTS
- slope Isoquants
Change K / change L
MPl / MPk
Returns to scale
The rate at which output increases in response to proportional increase in all inputs
Constant returns to scale
If inputs increase by a factor of X output increases by factor equal to X
Increasing / decreasing returns to scale
If inputs increase by factor of X output increase by factor greater/less than X
Reasons for scale (dis)economies
IRS
- fixed costs spread over more units
- should always be able to at least double everything and produce twice as much?
- scale allows specialisation
DRS
- limited resources in economy; costs begin increase
- managerial issues and coordination problems (lobbying)
- harder to give incentives to top manager / CEO
Economic costs
Additional amounts paid for something
- how much more you have to pay to hire another worker
Opportunity cost
Value that the inputs used in production would generate in thief next best use
Accounting cost
What was actually paid
Formulas
TC = wL + vK (W= wage rate v= rental rate)
Economic profit = TR-TC
Profit = PQ -wL - vK
Cost minimisation
Choose point where RTS = ratio of input prices (wage rate/rental rate)
- same ratio of marginal productivity price for each input used
Expansion path
Set of cost minimising input combinations a firm will choose to produce various levels of output (when prices of inputs = constant)
Short run
Period of time in which a firm must consider some inputs to be fixed
LR = all variable
Firm
An entity that transforms inputs into outputs
Assume goal = max profits
Marginal revenue
Additional gross income a firm gains from increase the quantity it supplies by one unit
