Theory of the firm pt 1 Flashcards
Fixed factor
An input than cannot be changed in supply immediately (in the short-run)
Variable factor
An input that can be changed in supply within a given time (long run)
Productivity
The amount of output per input, being more productive means making more from the same amount of resources
Short Run
The period of time that at least one factor is fixed, this depends on the industry
Law of diminishing returns
When one or more factors are fixed, there will be a point beyond which the extra output from additional units of the variable factor will diminish
Fixed costs
Total costs do not vary with the amount of output
Variable costs
Total costs do vary with the amount of output produced
Total costs
Fixed costs + Variable Costs
Average costs
total costs divided by quantity
Average variable costs
total variable costs divided by quantity
Average fixed costs
total fixed costs divided by quantity
Marginal Costs
The increase in total costs of producing an extra unit of output
change in total costs/change in quantity
Long run
The period of time that all factors are variable
Constant returns to scale
when an increase in inputs leads to the same increase in the output
Increasing returns to scale
when an increase in inputs creates a larger amount of outputs than what was inputted
Decreasing returns to scale
when an increase in inputs lead to the smalls increase in outputs
Economies of scale
When increasing the scale of production will lead to lower cost per unit
Diseconomies of scale
when the cost per unit of output increases scale of production
Long run marginal costs
The cost of producing one more unit of output, but assuming that all factors are variable and find the lowest cost of production
Total revenue
total earnings
price x quantity
Average revenue
the amount a film earns per unit sold
total revenue / quantity
Marginal revenue
the change in total revenue / change in quantity
Price taker
a firm that is too small to influence the market
Price maker
a firm that has some power to dictate the price changes for its product
Profit
total revenue - total costs
Profit maximisation
when mc=mr and has the biggest gap between tc and tr
Normal Profit
Earnings needed to keep a firm operating
Profit is needed to cover variable costs and opportunity costs
Supernormal factor
any profit larger than normal profit
Economic costs
accounting costs and opportunity costs
Allocative efficiency
when resources are allocated to satisfy consumers as much as possible when MC =AC
Productive efficiency
When a firm has the lowest possible average cost curve
