Production and Costs Flashcards
Firm
An organisation that converts input ms to outputs
Inputs
Capital
Labour
Materials
Outputs
Goods
Services
What is a necessary but not sufficient condition for profit maximisation
Efficient production
What does the production function show?
The maximum amount of output that can be produced from the inputs
Short run
Where capital is fixed
Marginal product of labour
The additional output produced by an extra unit of labour
MPL= pdq/pdL
Average product of labour
The ratio of output to the amount of labour employed
APL= q/L
Isoquant
Shows the combinations of inputs that will produce a specific level of output.
Isoquant properties
- Isoquants further from the origin have a greater level of output
- Isoquants don’t cross
- Isoquants slope downwards
- Isoquants must be thin
Isoquants have cardinal properties
What is the slope of an isoquant called?
The marginal rate of technical substitution (MRTS)
What is the MRTS equal to?
-MPL/MPK
Constant returns to scale
When a % increase in inputs is followed by the same % increase in outputs. Occurs in all linear functions
Increasing returns to scale
When a % increase in inputs is followed by a larger % increase in outputs
How do we measure the costs of capital?
Rent or if there is no rental market then the opportunity cost of using that capital
Sunk costs
These are past expenditures that can’t be recovered, these should never be relevant in production decisions
Fixed costs
Costs that don’t vary with the level of output. Costs that are fixed in the short run can be variable in the long run
Marginal costs
The change in costs if the firm produces an additional unit of output.
MC= dc(q)/dq = dvc(q)/dq
MC= w/MPL
Average fixed costs
Fixed costs divided by output
AFC= FC/q
Average variable costs
Variable costs divided by output
AVC=VC/q
AVC= w/APL
Average total costs
Total costs divided by output
AC= C/q
Long run
Where are all factors are variable so there are no fixed costs
Isocost
Summarised all combinations of inputs that require the same total expenditure
Isocost equation
K= -w/r x L + c/r
How are budget constraints different to isocost lines?
Consumers have one budget constraint, fiend can have many isocost lines
Properties of isocost lines
- the firms cost level c and in our prices determine where the isocost line hits the axes
- isocosts farther from the origin have higher costs
- the slope of each isocost is given by -w/r
At which point is production maximised?
When MRTS= -w/r
MPL/w= MPK/r
If a firm’s isoquants exhibit a diminishing marginal rate of technical substitution then
A) the more labour the firm has, the easier it is to replace capital with labour
B) the marginal product of capital will increase as we increase capital inputs
C) the firm can’t have a linear production function
D) the firms production function must be subject to decreasing returns to scale
C) the firm can’t have a linear production function
