Theory of the Firm Flashcards
3 inputs used in the production process
Land Labour Capital
Define total output
Total quantity of products produced (total product)
Define average output
Total output/Total input (average product)
Define marginal output
addition to total output by using an extra unit of input E.G. Labour
Define the short-run (SR)
The time period where at least one factor of production is fixed.
Define the Long-run (LR)
A time period in which all factors of production are variable.
What is the Law of diminishing returns
As you add a variable factor of production to fixed ones marginal out put will rise then fall.
Define Increasing returns of scale
When the % change in output is larger than the % of input
Define Constant returns of scale
% change of output is equal to % change in inputs
Define Decreasing returns of scale
% change of output is less than % change of input
Define Fixed Cost (FC)
Costs that don’t vary with the level of output e.g. rent
What does the fixed cost diagram look like
What is avergae fixed costs?
Fixed cost devided by total output.
what does the Average fixed cost diagram look like
What are variale costs?
Costs that change with output e.g. wages
What are average variable cost?
Total variable cost devied by tocal output
What are average total costs
Total cost divided by total output
What does average total cost and average variable cost look like on a diagram?
Define total cost of production
Fixed cost added to total costs
Define Margional cost
The cost of producing one extra unit of output
what does the margional cost diagram look like?
Is Margional cost effected by fixed cost?
NO due to only using in the short run
what componets make up total revenue (total sales revenue)?
Price x Quantity
When is sale maximisation achived?
When MC=0
How would you show sale maximisation on a graph
Define Margional revenue (MR)
The addition to total revenue of adding one extra unit of output.
Define profit
total revenue minus total cost. Proft will aways be made when AR is greater than AC.
What is normal profit?
The minimum amount of profit a firm makes to stay in buisness.
What is super normal profit?
Proft above normal profit
