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Economics - Micro > Production > Flashcards

Production Flashcards

1
Q

Define production.

A

The process by which a person, company, government or non-profit agency uses inputs to create a good or service for which others are willing to pay

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2
Q

Define production function.

A

A mathematical relationship that describes how much output can be made from different combinations of inputs

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3
Q

Define short run.

A

The period of time during which one or more inputs into production cannot be changed

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4
Q

Define long run.

A

The period of time during which all inputs into production are fully adjustable

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5
Q

What two inputs can a firm use to make its product?

A

Capital and labour

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6
Q

Name 6 assumption to model producer behaviour.

A
  1. ) The firm produces a single good
  2. ) The firm has already chosen which product to produce
  3. ) The firm’s goal is to minimise the cost of production
  4. ) The more input a firm uses the more output it makes
  5. ) The firm can buy as many capital or labour inputs a it wants at fixed prices
  6. ) Firms face no capital restraint
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7
Q

What can and can’t firms change in the short run?

A

They can change labour as much as they want, but not how much capital it uses

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8
Q

What type of marginal returns to a firm’s production exhibit to labour and capital?

A

Diminishing marginal returns

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9
Q

What variables make up the production function

A

Capital and labour

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10
Q

What is the general equation for a production function?

A

Q = f(K,L)

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11
Q

In the long run what do producers behave just like?

A

Consumers

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12
Q

What is the production function similar to?

A

The utility function

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13
Q

Define the marginal product of labour.

A

The extra output that you can produce using one extra unit of labour

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14
Q

Define the marginal product of capital.

A

The extra output you can produce using one extra unit of capital

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15
Q

Define isoquant.

A

A curve representing all the combinations of inputs that allow a firm to make a particular quantity of output

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16
Q

What is the isoquant similar to?

A

The indifference curve

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17
Q

Define marginal rate of technical substitution.

A

The rate at which the firm can trade input X for input Y holding output constant

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18
Q

In what part of the isoquant is marginal product of labour high relative to the marginal product of capital?

A

To the left

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19
Q

What is the MRTS the ratio of?

A

MPL/MPK

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20
Q

What is meant by MRTS being 12?

A

You are willing to substitute 12 units of capital for one unit of labour

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21
Q

How does MRTS relate to the isoquant?

A

It is -1 times the slope

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22
Q

Define isocost line.

A

A curve that shows all of the input combinations that yield the same cost

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23
Q

What is the isocost line similar to?

A

Budget constrain line

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24
Q

What is the general equation for the isocost line?

A

C = rK + wL, where r is the unit cost of capital and w the unit cost of labour

25
Q

Draw a isocost line and isoquant.

A

Picture

26
Q

What is held constant as you move along the isoquant?

A

Units of output

27
Q

What do producers want to maximise and minimise?

A

They want to maximise output and minimise costs

28
Q

What is more useful cost minimisation or output maximisation?

A

Cost minimisation

29
Q

What is the name of particular equation we use for the production function?

A

Cobb-Douglas

30
Q

What is the Cobb-Douglas equation for production?

A

Q = K^aL^b

31
Q

How do we determine the optimum amount of capital and labour we will use from the isoquant and isocost line?

A

When the slopes are the same

32
Q

What is meant by output maximisation?

A

Looking at output subject to costs

33
Q

What is meant by cost minimisation?

A

Looking at costs subject to output

34
Q

How do you find the optimum amount of capital and labour numerically?

A

The slope of the isoquant = w/r (unit prices) = MRTS
We know MRTS = MPL/MPK so sub in the two equation for MPL and MPK to then set equal to the value of w/r, and find an equation of L in terms of K. Then if we are output maximisation sub into the isocost and if we are cost minimisation sub into the isoquant.

35
Q

What does the long-run expansion path graph show in this case?

A

How cost minimising levels of capital and labour change as the market changes

36
Q

How do you find the long-run expansion path?

A

Plot different isoquant lines and the corresponding isocost lines and then join up the cost minimisation points

37
Q

Draw the long run expansion path

A

Picture.

38
Q

Does the long run expansion path have to be a straight line.

A

No

39
Q

What do total cost curve graphs show?

A

How the cost changes as output changes

40
Q

What is fixed in the short run?

A

Capital

41
Q

How do you find the optimum levels of output in the short run compared to the long run?

A

Instead you’ll have to use fixed value for K and then substitute that in

42
Q

What does the short-run expansion path look like?

A

A straight line

43
Q

Why is the short-run expansion path a straight line?

A

In the short term they must use 70 units of output, so all outputs will lie on this line even if the market changes

44
Q

How do the cost in the short run and long run compare?

A

Higher in the short run

45
Q

What does economics of scale look at?

A

What happens when you change the units of labour and or capital

46
Q

Why is economics of scale only a property for the long run?

A

Because in the short run you can’t change capital so it doesn’t make sense to ask this question

47
Q

Define returns to scale.

A

A change in the amount of output in response to a proportional increase in all of the inputs

48
Q

Define constant returns to scale.

A

A production function for which changing all inputs by the same proportion changes the quantity of the output by the same proportion

49
Q

Define increasing returns to scale.

A

A production function for which changing all inputs but the same proportion changes output more proportionately

50
Q

Define decreasing returns to scale.

A

A production function for which changing all inputs by the same proportion changes output less proportionately

51
Q

If I double all inputs what new and old levels of output show decreasing returns to scale?

A

Qnew < 2Qold

52
Q

If I double all inputs what new and old levels of output show constant returns to scale?

A

Qnew = 2Qold

53
Q

If I double all inputs what new and old levels of output show increasing returns to scale?

A

Qnew > 2Qold

54
Q

Define expansion path.

A

A curve that illustrates how the optimal mis of inputs varies with total output

55
Q

Define total cost curve.

A

A curve that shows a firm’s cost of producing particular quantities

56
Q

Define diminishing marginal product.

A

As a firm hires additional units of a given input, the marginal product of that input falls

57
Q

What is diminishing marginal product similar to?

A

Diminishing marginal utility

58
Q

What shows the diminishing marginal product of labour numerically?

A

If you differentiate MPL with respect to labour it should be <0

59
Q

Define marginal product.

A

The additional output that a firm can produce by using an additional unit of an input, holding the other one constant

Economics - Micro (12 decks)

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