Theory of the firm Flashcards
factors of production
land labor capital enterprise
law of deminishing returns
refer to a point at which the level of profit or benefits gained is less than the amount of money invested
cost of production
can be fixed TFC
variable TVC
total fixed cost definition
cost that does not change with an increase or decrease in the amount of goods or services produced
Total variable cost definition
coat that vary depending on a company’s production volume
average fixed cost def
fixed cost of production divided by quantity of output produced
average variable cost def
AVC=TFC/Q
variable cost of production divided by quantity of output produced
marginal cost def
added cost incurred in producing an additional unit of output.
MC=change TC/change Q
average total cost
ATC= AFC+AVC
total cost of production divided by quantity of output produced
total cost
TC=TFC+TVC
why MC cross ATC?
MC= one extra
ATC= the average
when we have one more test and get a bad grade, the average go down. As more you take tests, the average will cross the marginal curve. MC cannot go down while ATC can at some example
increasing return def
operate every additional investment of capital and labour yield less than proportionate returns
constant return def
ratio between the input and outputs
zero return def
When there is no profit
negative return def
each additional unit of output reduces the level of output
marginal product def
MP=change TP/change#workers
output that results from one additional unit of a factor of production , all other factors remain constant
diminishing return def
refer to a point at which the level of profit or benefits gained is less than the amount of money invested
the spreading effect
The larger the output the greater the quantity of output over which fixed cost is spread leading to lower average cost
the short run
taken or considered over a short period of time
the long run
all costs are variable in the long run
Long run average total cost def
LRATC
the relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output
economies of scale def
when increasing the scale of production leads to a lower cost per unit of output
constant cost def
the point between disec and econ of scale
diseconomies of scale
where the costs per unit of output increase as the scale of production increases.
internal economies of scale
firm-specific, or caused internally, while external economies of scale occur based on larger changes outside of the firm. Both types result in declining marginal costs of production; yet, the net effect is the same.
internal diseconomies of scale
economies of scale no longer function for a firm. Rather than experiencing continued decreasing costs per increase in output, firms see an increase in marginal cost when output is increased.
external economies of scale
increase the productivity of an entire industry, geographical area or economy. The external factors are outside the control of a particular company, and encompass positive externalities that reduce the firm’s costs
external diseconomies of scale
factors beyond the control of a company increases its total costs, as output in the rest of the industry increases. The increase in costs can be associated with market prices increasing for some or all of the factors of production
internal vs external economies of scale effect on the graph
internal sources cause a movement along the LRATC curve
external source cause a shift in the LRATC curve
sources of internal economies of scale
- technical source
- managerial
- marketing
- distribution
sources of external economies of scale
- infrastructure (roads, electricity …)
- strong industry (competitors)
minimum efficient scale
the level of output where econ of scale and constant cost start
optimal output
maximum quantity produced before the company starts to experience diseconomies of scale
revenue def
firms total earnings from a specified level of sales within a specified period
total revenue
TR=QxP
firms total earnings from a specified level of sales within a specified period
average revenue
AR=TR/Q
is the amount that the firm earns per unit sold
marginal revenue
MR=(change TR)/(change in Q)
the total extra revenue by selling one more unit (per period of time)
profit maximization rule
he short run or long run process by which a firm determines the price and output level that returns the greatest profit.
MC=MR
normal profit
returns or earnings needed to keep a firm operating
economic profit
The monetary costs and opportunity costs a firm pays and the revenue a firm receives. calculated by substrating explixit cost and implicit cost
explicit cost
A direct payment made to others in the course of running a business, such as wage, rent and materials, which are those where no actual payment is made.
implicit cost
The opportunity cost equal to what a firm must give up in order to use factor of production which it already owns and thus does not pay rent for.
