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Uni Econ micro > Production theory > Flashcards

Production theory Flashcards

1
Q

What is the short run

A

Only one factor of production is variable others are fixed

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2
Q

What is the long run?

A

All factors of production are variable

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3
Q

What is short run proudction subject to?

A

Short-run production is subject to the law of diminishing returns

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4
Q

What do we assume firms aim to do?

A

Profit max

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5
Q

What is a firms profit?

A

Total revenue- Total cost

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6
Q

What is opportunity cost?

A

the cost of something is what you give up to receive it

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7
Q

What does a firms opportunity cost include?

A

A firm’s costs include opportunity costs: the value of the next best alternative

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8
Q

What do explicit costs require?

A

Explicit costs: require a cash flow from the firm
● when £1000 is used to pay workers, that £1000 can’t be used for something else

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9
Q

What do implicit costs not require?

A

Implicit costs: do not require a cash to flow out of the firm
● running business is costly: owner could do something else with time & money

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10
Q

What is accounting profit?

A

Accounting profit = total revenue – explicit costs

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11
Q

What si economic profit?

A

Economic profit = total revenue – explicit costs – implicit costs

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12
Q

How does output change?

A

With labout and capital

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13
Q

In the short run what is the only FoP which can vary?

A

Labour

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14
Q

What is total phsycial product of labour?

A

Total physical product of labour (TPPL)

This is total output that is produced by the units of labour, for a given capital

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15
Q

What is average physcial product of labour?

A

Average physical product of labour (APPL)

This is the average output produced by the units of labour, for a given capital

APPL = TPPL/L

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16
Q

What is marginal physical product of labour?

A

Marginal physical product of labour (MPPL)

This is the extra output of producing one more unit of labour, for a given capital MPPL = ∆TPPL/∆L = TPPL+1 – TPPL

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17
Q

What is the law of dimishing returns?

A

LAW OF DIMINISHING RETURNS:
When some factors are fixed in the short run, employing another unit of a

variable factor eventually results in smaller and smaller increases in output This means to increase production, larger amounts of variable factors must be used

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18
Q

Why will TPP fall in the short run?

A

In the short-run, it is just impossible that increasing the hire of variable factor can increase output indefinitely…

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19
Q

Explain the shape of the TPP curve?

A

Indicated by the change in the labour hired leading to the change in

D TPP / D L = MPP

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20
Q

Diagram to show TPP and MPP

A
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21
Q

Diagram to show the relation between TPP and MPP

A
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22
Q

Relationship between MPP and APP

A
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23
Q

Diagrams to plot TPP, APP and MPP

A
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24
Q

Relationship between costs and production in the SR

A

Firms incur costs when they buy factors of production: more inputs, higher costs

Variable factor usually labour: easier to increase labour quickly than capital

EXAMPLE:
Consider a small farm that produces wheat
To produce wheat it requires just two factors of production: workers and tractors

In the short-run - number of tractors is constant, more workers can be employed

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25
Q

Total costs equation

A

Total costs (TC) = total fixed costs (TFC) + total variable costs (TVC)

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26
Q

What are total fixed costs?

A

Total fixed (economic) costs (TFC)

Fixed costs are not related to the amount of output produced

● They are incurred even if nothing is produced
● They can change but not as a result of affecting output

These relate to “costs for tractors” in our previous example

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27
Q

What are total variable costs?

A

Total variable (economic) costs (TVC)

Variable costs are related to the amount of output produced

● They are not incurred if nothing is produced ● They increase as more is produced

These relate to “costs of workers” in our previous example

28
Q

What is average total cost?

A

1) Average total cost (ATC) = average variable cost (AVC) + average fixed cost (AFC)

This is the average cost per unit of output

ATC =TC/Q=(TVC+TFC)/Q
= TVC/Q + TFC/Q = AVC + AFC

29
Q

What is marginal cost?

A

This is the extra cost of producing one more unit of output (Recall that ∆ means change)

MC = ∆TC/∆Q = TC(Q+1) –TC(Q)

30
Q

Diagram to show total cost curves

A
31
Q

Diagram to show average and marginal cost curves

A
32
Q

Methods to derive the shape of the average and marginal cost curves

A
  1. Method 1:
    The numerical example we just saw

This method helps us to draw the curves and understand the relationships among ATC, AVC and MC

  1. Method 2:
    The one we will be looking at
    Using the link between the “physical product of labour” and the “cost” Physical product of labour includes: MPP, APP and TPP
    Costs include: Marginal cost, average cost, and total cost
33
Q

How the shapes of average and marginal cost curves are dervied

A
34
Q

Shape of MC explained

A

Marginal costs

This is related to the marginal product of the variable factor Falling MC = increasing returns

Rising MC = diminishing returns

35
Q

Shape of Average cost curves explained

A
36
Q

Diagram showing MC, ATC and AVC

A
37
Q

Summary notes for short run production and costs

A
38
Q

When is a seller a price taker?

A

Price takers

● A seller is a price taker if it can sell as much as it wants at a given price Price takers are small compared to the size of the market

39
Q

What is market price elastciity of deamnd?

A

price elasticity of demand (PED) = –

% change in quantity demanded/ % change in price

40
Q

When is a buyer a price taker?

A

A buyer is a price taker if the individual can buy as much as the individual wants at a given price without affecting the price

41
Q

When is a seller a price maker?

A

A seller is a price maker if the amount it sells affects the market price

42
Q

When is a buyer a price maker?

A

A buyer is a price maker if the amount it buys affects the market price

43
Q

Normal profit?

A

Firm breaks even

44
Q

Supernormal profit?

A

Firms total revenue is greater than its total costs

45
Q

Diagram to show a firms revenue, costs and profit

A
46
Q

What is average revenue?

A

1) Average revenue (AR)

This is the amount that the firm earns per unit of output sold AR = TR/Q

47
Q

What is marginal revenue?

A

2) Marginal revenue (MR)

This is the extra revenue of selling one more unit of output MR = ∆TR/∆Q = TR(Q+1) –TR(Q)

48
Q

Show the demand curve of a price taking firm and explain why

A
49
Q

Profit equation

A

Profit = total revenue – total fixed costs – total variable costs

50
Q

Short run shut down rule

A
51
Q

Long run shutdown rule

A
52
Q

Supernormal profit in SR diagram

A
53
Q

Diagram to show a loss of a firm

A
54
Q

Diagram to show loss in the short run

A
55
Q

When should a firm not shutdown?

A
56
Q

When should a firm shutdown?

A
57
Q

If a firm does not shut down, at what level should it produce and why?

A
58
Q

What is the marginal output rule?

A
59
Q

Where a profits maxed in the SR?

A

Where MC=MR

60
Q

Diagram to show profit max in the short run

A
61
Q

When are loss minimised?

A

At a point where MR=MC

62
Q

Diagram to show loss minimisation in the short run

A
63
Q

Why does the supply curve slope upwards?

A

As price increases, the quanityt supplied by the firm increases

64
Q

Diagram to show upwards sloping supply curve

A
65
Q

Summary notes of revenue and profit max

A
66
Q
A
67
Q
A

Uni Econ micro (7 decks)

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