Supply Flashcards
What are the different production periods and how are they defined?
-The short run is when at least one of the FOPs is fixed
-The long run is when all FOPs are variable
What is the production function?
Q= Af(K,L)
What is the marginal product of labour?
dQ/dL
What is the marginal product of capital?
dQ/dK
Why does MPL have d^2Q/DL^2<0
-Specialisation and DOL initially increases the MPL
-Diminishing marginal returns result in a decreasing MPL
What are constant returns to scale?
f(xK,xL)=xf(K,L)
What are increasing returns to scale?
f(xK,xL)>xf(K,L)
What are decreasing returns to scale?
f(xK,xL)<xf(K,L)
What are potential reasons for IRS?
-Leaning by doing (WoN)
-Specialisation (WoN)
-Financial economies of scale (bulk discounts)
-Physical economies of scale
-Spreading the cost of indivisible inputs (fixed costs)
What are potential reasons for DRS?
-Managerial diseconomies: more levels means slower decision making
-Duplication/ rework
-Communication costs
-Size constraints
What is the optimal labour quantity for a firm?
dQ/dL=w/P
What is the accounting cost?
This is the actual payments made by the firm in a period
What is the opportunity cost?
This is the amount given up when using a resource in the firm rather than its best alternative
Are opportunity costs included in the firm’s total costs?
Yes
What is normal profit?
This is when the ROI=costs
What is supernormal profit?
ROI>costs
What are the characteristics of fixed costs?
-Firm is unable to change them in the short run
-Do not vary with production
-Can be sunk or recoverable
What are the characteristics of variable costs?
-Firm can change them in the short run
-Vary with production
What are sunk costs?
These are costs which are not recoverable even in the long run
What is the total cost?
Total Cost (TC)= sum of all costs incurred in production
What is average cost?
AC= TC/Q
What is the marginal cost?
MC= dTC/dQ
What the average fixed cost?
Fixed Cost/Q
What is the average variable cost?
Variable Cost/Q
What is the LR Average Total Cost
LR Average Total Cost= Long Run Average Variable Cost
This is because by definition there are no fixed costs in the long run
Describe the relationship between MC and AC
-MC must intersect with the AC curve
-If MC>AC, dAC/dQ >0
-If MC<AC, dAC/dQ<0
-If MC=AC, dAC/dQ=0 and d^2AC/dQ^2>0 so AC are minimised
