The Theory If The Firm: Production And Costs Flashcards
Definition
The concept that a firm exists and makes decisions solely to maximise profit
Production function
Specifies the maximum level of output that can be produced in terms of the amounts of output that can be produced in terms of the amounts of input being used
Short run
At least one factor of production is fixed and can’t be varied
Long run
All factors can be changed and theres more constraints in short run
Total cost formula
Total cost = Fixed cost + variable cost
TC = FC + VC
Law of diminishing return
States that the extra output will decrease as more units of variable factors are added to the fixed factor
Marginal cost formula
Marginal cost = change in total cost divided by change in quantity
Marginal cost labour formula
Marginal cost labour= change in total cost of labour divided by the change in labour employment
What happens if there are demonising returns to labour
The marginal cost of labour will rise
Average cost formula
Average cost= TC divided by quantity
What happens if marginal cost falls below average cost
If marginal cost falls below average cost then average cost decreases
What happens if marginal cost rises above average cost
If marginal cost rises above average cost the average cost increase
When will a firm prefer to produce nothing
When the market price is less then the average variable cost the firm will prefer to produce nothing
What are the types of return to scale
.constant, increasing and decreasing. This refers to how a firms output increases in real action to inputs
Types of return to scale - long run
Internal economies of scale- lower unit costs as a result of a larger size factory
