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Econ 11 > Theory of Production and the Firm > Flashcards

Theory of Production and the Firm Flashcards

1
Q

the study of how firms’ decisions about prices and quantities depend on market conditions

A

Industrial Organization

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2
Q

The goal of a firm

A

Maximize profit

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3
Q

total revenue (formula)

A

P x Q

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4
Q

Profit (formula)

A

TR - TC

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5
Q

require an outlay of money by the firm

A

Explicit Costs

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6
Q

do not require an outlay of money by the firm

A

Implicit Costs (ex: rent)

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7
Q

relationship between the quantity of inputs and quantity of outputs

A

production function

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8
Q

the increase in output that arises from an additional unit of input

A

marginal product

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9
Q

marginal product declines as the quantity of input increases

A

diminishing marginal product or law of diminishing returns

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10
Q

Does not depend on the quantity of output produced

A

fixed costs

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11
Q

A cost that changes as the firm alters the quantity of output produced

A

variable costs

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12
Q

total cost (formula)

A

FC + VC

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13
Q

Average total cost (formula)

A

TC / Q

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14
Q

an increase in total cost that arises from an extra unit of production

A

marginal cost

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15
Q

Three common features of cost curves

A
  1. MC rises with quantity output
  2. ATC is U-shaped
  3. MC crosses ATC at the minimum of average total cost
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16
Q

The efficient scale of the firm

A

the quantity that minimizes average total cost

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17
Q

When MC < ATC

A

ATC is falling (a good thing)

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18
Q

When MC > ATC

A

ATC is rising (bad)

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19
Q

When long-run ATC declines as output increases,

A

there are economies of scale

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20
Q

When long-run ATC rises as output increases

A

there are diseconomies of scale

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21
Q

the economies stock of equipment and structures

A

capital

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22
Q

inputs used to produce goods and services

A

factors of production

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23
Q

demand for a factor of production

A

derived demand

24
Q

increase in output produced by an increase in labor

A

marginal product of labor

25
Q

Price times Marginal Product of Labor

A

Value of the Marginal Product

26
Q

extra revenue from adding labor (VMP - Wage)

A

Marginal Revenue Product

27
Q

The goal of Profit Maximizing Firms (equation)

wage and prices

A

VMP = Wage

P > ATC

28
Q

What causes labor demand curve to shift?

A
  1. Output Price (increase in price)
  2. Technological Change
  3. Supply of other factors
29
Q

The process by which inputs are combined, transformed, and turned into outputs.

A

Production

30
Q

An organization that comes into being when a person or a group of people decides to produce a good or service to meet a perceived demand.

A

firm

31
Q

Basic decisions of firms

A
  1. How much output to supply
  2. Which production technology to use
  3. How much of each input to demand
32
Q

The total of (1) out-of-pocket costs or explicit cost, (2) normal rate of return on capital, and (3) opportunity cost of each factor of production or implicit cost.

A

Total cost or total economic cost

33
Q

Annual flow of income generated by an investment.

Rate of return of capital that is just sufficient to keep owners/investors satisfied

A

Normal Rate of Return

34
Q

The firm is operating under a fixed scale (fixed factor) of production, and firms can neither enter nor exit an industry

A

short run

35
Q

Firms can increase or decrease the scale of operation, and new firms can enter and existing firms can exit the industry

A

long run

36
Q

The production method that minimizes cost.

A

Optimal Method of Production

37
Q

The quantitative relationship between inputs and outputs.

A

Production Technology

38
Q

Technology that relies heavily on human labor instead of capital.

A

labor-intensive technology

39
Q

Technology that

relies heavily on capital instead of human labor

A

capital-intensive technology

40
Q

When additional units of a variable input are added to fixed inputs after a certain point, the marginal product of the variable input declines.

A

law of diminishing returns

41
Q

The average amount produced

by each unit of a variable factor of production

A

average product

42
Q

Two things determine the cost of production

A

(1) technologies that are available and (2) input prices

43
Q

A graph that shows all the combinations of capital and labor that can be used to produce a given amount of output.

A

Isoquant

44
Q

A graph that shows all the combinations of capital and labor available for a given total cost.

A

Isocost Line

45
Q

To calculate costs, a firm must know two things:

A
  1. Quantity and combination of inputs it needs to produce its product;
  2. how much those inputs cost
46
Q

Another term for fixed costs

A

sunk costs

47
Q

TVC depends on (2)

A

1) Techniques of production that are available

2) The prices of the inputs required by each technology

48
Q

_____ also intersects the average variable cost curve at its minimum point.

A

Marginal Cost

49
Q

Out of pocket costs or explicit costs

A

Accounting costs

50
Q

Includes the full opportunity costs of all inputs // implicit costs

A

Economic costs

51
Q

The profit-maximizing perfectly competitive firm will produce up to the point where the price of its output is just equal to

A

short-run marginal cost

52
Q

when the revenue received from the sale cannot even cover the variable costs

A

firm will shutdown production

53
Q

shutdown occurs when

A

marginal revenue is below average variable cost

54
Q

2 rules to maximize profits

A
  1. MR = MC

2. firm should shutdown rather than operate if it can reduce losses by doing so.

55
Q

shutdown rule

A

“in the short run a firm should continue to operate if price exceeds average variable costs.”

56
Q

three short-run

production alternatives facing a firm

A
  1. shutdown production if the price is less than average variable cost
  2. profit maximization
  3. loss minimization

Econ 11 (5 decks)

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