Production and Production Costs Flashcards
Inputs whose quantities can be readily changed in response to changes in market conditions.
Variable Inputs or Costs
What is a typical example of a variable input?
Labor
Inputs whose quantities can’t be readily changed in response to market conditions.
Fixed Inputs or Costs
What is a typical example of a fixed input?
Factory
Happens when a firm produces the maximum output possible for a given combination of inputs and existing technology.
Technical Efficiency
It is when every input is being utilized to the fullest extent possible, and there is no other way to get more output without using more of at least one input.
Technical Efficiency
Achieved when the firm produces its chosen level of output at the lowest possible total cost.
Economic Efficiency
It is the focus of managers because profit cannot be maximized unless the firm’s output is produced at the lowest possible cost.
Economic Efficiency
Refers to the different input combinations used to efficiently produce a specified output.
Isoquants
This refers to technical efficiency, or the least-cost production of a target level of output.
Isoquants
This is similar to an indifference curve, since the points that lie on the same graph are inputs that, when combined, produce the same level of output.
Isoquants
What do firms use so they could utilize various combinations of inputs to produce the same level of output.
Multiple variables of production
What isoquant is associated with higher levels of output?
A higher isoquant
The rate at which a producer can substitute between two inputs and maintain the same level of inputs.
MRTS
Marginal Rate of Technical Substitution
It is the absolute value of the slope of the isoquant and is the ratio of the marginal products.
Marginal Rate of Technical Substitution
It states that as less of one input is used, increasing amounts of another input must be employed to produce the same level of output.
Law of Diminishing Marginal Substitution
It shows all the different costs that can arise from the different levels of inputs.
Isocosts
What happens to the slope of isocost line when there is a change in the input costs?
It will change.
What happens to the firm and the line if the price of one input falls?
Firms could buy more of that input.
Line will shift away from the origin.
The slope depends on the prices of inputs and the amount of money which the firm spends.
Isocosts
How can firms maximize their profits?
- By maximizing the level of output for a given cost.
- By minimizing the cost of producing a given output.
What happens to the cost when the slope of the isoquant (MRTS) is equal to the slope of the isocost line (cost of production)?
It will be minimal.
What happens when the firms produce lower than the cost-minimizing input mix?
They could produce more with the same amount of inputs.
What happens when the firms produce more than the cost-minimizing input mix?
The cost of production is too high.
The sum of variable and fixed costs.
Total Costs
Its curve slope upward.
Total Costs
Why does the total cost curve slope upward?
Because increasing output increases total costs.
These are costs per unit of output.
Average Costs
They indicate how efficiently scarce resources are being used (lower ATC means less cost per good).
Average Costs
It can be computed by adding the average variable costs and the average fixed costs.
Average Costs
Obtained using the equation TFC/Q
Average Fixed Costs
Obtained using the equation TVC/Q
Average Variable Costs
Obtained using the equation TC/Q
Average Total Costs
It is high when there are relatively low levels of output.
Average Fixed Costs
In a graph, it first declines, then rises.
Average Variable Costs
It has the same general structure as the AVC, in that it first declines, then increases.
Average Total Costs
Its minimum is attained at a larger quantity than at which the AVC attains its minimum.
Average Total Costs
It’s the change in total cost when production increases by one unit.
Marginal Cost
It is derived solely from the variable costs, and not the fixed costs.
Marginal Cost
What happens to the marginal costs when a firm incurs costs when making goods and services and can be covered by additional products sold?
Decreasing/Falling
What signifies the point where the marginal costs neither decrease nor increase?
It signifies the highest quantity a firm can produce while keeping costs at a minimum.
What happens to the marginal costs when the firm produces an additional unit beyond a certain point?
Increase
What is the lowest price that a firm is prepared to supply?
The price that just covers marginal cost.
What happens to short-run MC when ATC is at minimum?
It equals ATC.
What happens to short-run MC when AVC is at minimum?
It equals AVC.
What happens to the average cost when MC is below the ATC and AVC curves?
Decline
What happens to the average cost when MC is above the ATC and AVC curves?
Rises
Known as the envelope curve and is drawn on the assumption that there is an infinite number of production plants.
LRAC
Long Run Average Cost Curve
It defines the minimum average cost of producing alternative levels of output, allowing for optimal selection of both fixed and variable factors of production.
Long Run Average Cost Curve
Why is LRAC known as the envelope curve?
Because it’s the lower portion of all short-run cost curves.
What is the firm experiencing when the LRAC is falling when output is increasing?
Economies of Scale
They are cost advantages from expanding the scale of production in the long run.
Economies of Scale
It reduces average costs over a range of outputs.
Economies of Scale
What happens to the economies of scale when the long run average total cost curve is declining?
Being exploited
What do you call when after a point, further increases in production will lead to an increase in the average costs?
Diseconomies of Scale
They are seen when LRAC is rising.
Diseconomies of Scale
What is the condition when the technology in an industry allows a firm to produce different levels of output at the same minimum average cost?
Constant Returns to Scale
Short Run or Long Run
Capital assets are fixed
Short Run
Short Run or Long Run
Amount of inputs is the only available business decision
Short Run
Short Run or Long Run
Fixed costs are already paid and unrecoverable
Short Run
Short Run or Long Run
Number of firms in the market is fixed. Firms have already chosen what industry they will enter and the scale of the technology of production.
Short Run
Short Run or Long Run
Firms will produce if market price covers VC
Short Run
Short Run or Long Run
Profits can be positive, negative, or zero
Short Run
Short Run or Long Run
Not defined as a specific period of time
Long Run
Short Run or Long Run
It is the time horizon needed for a producer to have flexibility over all relevant production decisions, such as the number of workers or production processes.
Long Run
Short Run or Long Run
Fixed costs are not yet decided and paid. They are not truly “fixed”.
Long Run
Short Run or Long Run
Firms will enter if market price is high to result in a positive economic profit and will exit if market price is high to result in a positive economic profit
Long Run
Short Run or Long Run
If firms have the same costs, profits will be zero in a competitive market.
Long Run
Short Run or Long Run
Firms with zero profits have lower costs and can maintain positive economic profit.
Long Run
