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Microeconomics introduction > theory of supply > Flashcards

theory of supply Flashcards

1
Q

The slope of the indifference
curve equals what?

A

the marginal rate of substitution

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2
Q

A change in price implies what?

A

a change in relative prices
a change in purchasing power
a change in utility

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3
Q

A utility maximizing consumer does what?

A

sets the MRS equal to the price ratio
sets the marginal utility to price ratio equal for all goods
only buys affordable bundles

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4
Q

The Marginal rate of Substitution is always
constant along an indifference curve true or false

A

true

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5
Q

Utility maximization implies that the price ratio is
greater than the Marginal Rate of Substitution true or false?

A

true

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6
Q

The substitution and income effects always work in
the same direction true or false?

A

true

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7
Q

what do we assume about firms?

A

We assume firms maximize profit.

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8
Q

Profits formula is?

A

= total revenue – total costs
Π = TR - TC

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9
Q

what does revenue depend on?

A

Revenue depends on the demand function

Price x quantity

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10
Q

what does cost depend on?

A

Cost depend on the firm’s productivity and
input prices.

Expenses incurred by producing goods and/or
services

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11
Q

what is the Principal-agent problem?

A

the idea where shareholders want different things to managers and cant control them

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12
Q

what is a possible to solution to the principle agent pronblem?

A

give managers shares
– but managers might game incentives

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13
Q

Accounting costs are….

A

– Actual payments made by a firm in a given period

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14
Q

Oppurtunity costs are…

A

Amount lost by not using a resource in its best
alternative use

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15
Q

what is an economists indication of successs?

A

supernormal profits

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16
Q

what are supernormal profits

A

Supernormal profit is the pure profit
accruing to the owners after allowing for all
economic costs.

Accounting profits do not necessarily
indicate economic profits!

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17
Q

how do economists analyse profit maximisation?

A

Economists analyze profit maximization by asking
whether firm should produce additional output or
not.

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18
Q

profit maximizing point is

A

marginal revenue equals marginal cost.

MC = MR

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19
Q

what is Marginal revenue (MR)?

A
  • the increase in total revenue from selling an
    extra unit of output.
  • is not the revenue from the “last” unit sold.
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20
Q

why does MR steadily fall?

A

the extra unit must be sold at a lower price
(demand curve slopes down).

price reductions also reduce the revenue earned
from existing units of output

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21
Q

average revenue formula

A

AR = TR/Q

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22
Q

marginal revenue formula

A

MR= change in TR/ change in Q

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23
Q

where does MR lie?

A

MR lies below the demand curve.

MR is less than the price
at which the extra output is
sold.

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24
Q

The inverse demand function

A

P = a-bq

25
Q

Economists assume that firms

A

profit maximise

26
Q

Firms maximize profit by setting

A

mc=mr

27
Q

what does the production function state?

A

the maximum output that can be produced is, given inputs

28
Q

Inputs/factors of production

A

Any good or service that is used in output production

– e.g. capital, labour, natural resources, entrepreneurial ability…

  • The inputs used in production determine the
    amount of output produced!
29
Q

what is the short run?

A

The short run is the period where at least
one input/ factor of production is fixed.

Example: capital (buildings, machinery,
etc.) is fixed in the short run but labour
can vary.

30
Q

what is an input?

A

a factor of production

31
Q

what is the long run?

A

The long run is the period where no inputs
are fixed, all inputs are variable.

32
Q

The marginal product

A

is the increase in output obtained by adding 1 unit of
the variable factor (labour) but holding constant the
inputs of all other factors (capital, etc.)

32
Q

The marginal value product

A

the extra revenue from selling the output made by
an extra worker.
– marginal product of labour multiplied by output price

33
Q

Diminishing marginal product

A

Also called diminishing returns.

In the short run, the marginal product for a
factor decreases if at least one other factor is
held fixed.

– Trying to increase labour without also
increasing capital will bring diminishing
returns.

– Implies increasing marginal costs.

34
Q

what do costs depend on?

A

The firm’s production technology
– The technology gives the possibilities for
transforming inputs into output and is summarized
by the production function.
– Production function: input-output relationship.
* measures the output for given input(s)
– Cost function: cost-output relationship.
* measures total cost given output (and prices)
* Input prices

35
Q

What is the cost of a specific output quantity?

A

It is the cost of all the required inputs.

36
Q

Different (Short-run) Cost Definitions

A
  • Total Costs
    –Total Fixed Costs (TFC
    )
    –Total Variable Costs (TVC
    )
  • Average Costs
    –Average Fixed Costs (AFC)
    –Average Variable Costs (AVC)
  • Marginal Costs
37
Q

what are marginal costs?

A

Marginal cost (MC) is the rise in total cost
(TC) if output (Q) increases by 1 unit.

– the increase in TC that arises from an
extra unit of production.
– not the cost of producing the “last” unit

38
Q

marginal cost formula

A

change in total costs/ change in quantity

39
Q

As output increases, why might marginal costs
start high, then fall, then rise again?

A

-In the short-run for given capital increases in
labour specialization might decrease SMC.
– At some point more labour might start to get
into each other’s way and SMC start
increasing.

40
Q

For 2 goods the long-run production
function would be

A

y = f (x1,x2)

41
Q

What happens to output when we double all inputs (t=2)?

A

is the minimum cost of producing each output level when the
firm can adjust all inputs

42
Q

Long-run total cost (LTC)

A

– is the minimum cost of producing each output level when the
firm can adjust all inputs

43
Q

Long-run marginal cost (LMC)

A

– is the rise in LTC if output rises permanently by 1 unit
– required for deciding on the profit maximizing output

44
Q

Long-run average cost (LAC)

A

– is LTC/Q
– required for checking profit is positive

45
Q

when is economies of scale on lac curve

A

When long-run average costs decline as output rises

Reasons:
*Increasing returns
*Indivisibilities (fixed costs)
*Specialisation and division
*Labour
*Capital

46
Q

Constant economies of scale on a lac curve

A

When long-run average costs are constant as output rises

47
Q

Diseconomies of scale on a lac curve

A

When long-run average costs rise as output rises

Reasons:
* Decreasing returns
* Managerial
diseconomies
* Geography

48
Q

Minimum Efficient Scale

A
  • The quantity where economies of
    scale are exhausted.
  • A determinant for the intensity of
    competition, i.e. the number of
    competitors.
  • If MES is large relative to market size
    there will be a few firms only.
49
Q

where is MES on a lac curve?

A

lowest point

50
Q

Which UK industry has the
highest MES as % of market?

A

steel

51
Q

If MR > MC, an increase
in output will do
what to profits?

A

increase them

52
Q

If MR < MC, a decrease
in output will do
what to profits?

A

increase them

53
Q

If the firm is making a
loss when MR=MC what should they do

A

probably close down

53
Q

Mr max

A

MR = 0

54
Q

what is it if we double all inputs and all outputs double?

A

constant returns to scale

55
Q

if we double all inputs and outputs increase by more than twice what is this?

A

increasing returns to scale

56
Q

if we double all inputs and outputs increase by less than twice what is this?

A

decreasing returns to scale

Microeconomics introduction (7 decks)

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