Supply Flashcards
define a proprietorship
a firm that is owned by a single individual
define a partnership
a firm owned by two or more individuals and s usually run by the owners
define a corporation
a firm owned by several individuals [stockholders] but under the law has an existence that is separate from that of its owners
- separate management and ownership
define factors of production
inputs into production (labor, capital, land)
define physical capital
inputs into production that are themselves produced goods (tractors)
what is the difference between financial vs physical capital
the money used to start up or maintain a business = financial
physical = produced factors of production
describe, write, and label the production function
q= f(K,L)
q=output
K= kapital
L= labor
indicates the highest output q that a form can produce for every specified combination of inputs
define a production set
the set of all combinations of inputs and outputs that comprise a technologically feasible way of production
Why do we often assume a Cobb-Douglass production function?
the firm will pay c of its revenues to labor and 1-c of its revenues to buying and maintaining its capital
define decreasing returns to scale
output less than doubles when inputs all double
t * f(x1,x2) < f(tx1,tx2)
define constant returns to scale
output exactly doubles when inputs all double
t * f(x1,x2) =f(tx1,tx2)
define increasing returns to scale
output more than doubles when inputs all double
t * f(x1,x2) > f(tx1,tx2)
define opportunity cost and list an example
the cost of what give up to gain something else; the forgone cost; the cost of the best forgone alternative
example: the opportunity cost of going to college is the income you could have earned in the four years without college
in profit maximization it’s important to realize that accounting costs…
aren’t the only costs and opportunity costs are important as well
list and define the three types of costs
Fixed costs = costs that are constant regardless of the level of output (costs of building a factory)
Sunk costs = a kind of fixed costs that can not be recovered (paying for a moving company)
Variable costs = costs varying with output (wages)
inputs and outputs are measured in …
flows
Explain the sunk cost fallacy
While the ideal is that we make rational decisions based on value of objects, investments, and experiences ; sometimes our decisions can be tainted by the emotional investments we accumulate, and the more you invest in something, the harder it becomes to abandon it
Ex: i might as well finish this major since I’ve already taken the introductory class
define a fixed factor
a factor of production [an input] that is in a fixed amount for the firm under a time period of consideration
define a variable factor
a factor of production [an input] that a firm can change easily under a time period of consideration
Describe short run vs long run in regards to fixed and variable factors of production
long run is the amount of time needed to make all the inputs variable factors, while in the short run some factors are fixed
define an isoquant
curves that show all the possible combinations of inputs that will yield the same level of outputs
define marginal product
how output would change if we increased x1 by a little bit
MP(x1,x2) = df /dx1
define diminishing marginal product
as the use of one input increases and other inputs held fixed, the marginal amount q produced decreases (though the total 1 increases)
write the equations for the marginal product of labor and capital
see slides 377 & 378
define the technical rate of substitution
the rate at which a firm will have to substitute one input for another in order to keep the output constant ; the slope of the isoquant
define the law of diminishing technical rate of substitution
as we increase the amount of factor 1 and adjust factor two to stay on the same level of output, the technical rate of substitution declines [is like strict convexity]
