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Econ > Topic 12- The Costs of Production > Flashcards

Topic 12- The Costs of Production Flashcards

1
Q

What are the inputs used in firm activity

A

LABOUR
CAPITAL
NAT RES

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2
Q

How do firms turn inputs into outputs?

A

Technology

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3
Q

Production Function

A

Relation between the imputs employed by a firm and the manimum output that can be produced

relation b/w max output attainable and amount of capital and labour

Quantity of Output=f(Labour,Kapital)

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4
Q

What is the main objective of the firm

A

Profit Maximization

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5
Q

Two time frames of firm decision making

A
  1. Short Run
  2. Long Run
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6
Q

Short Run time fram of firms DESCRIBE

A
  1. when the quantity of at least one of the firm’s inputs in production is fixed <3
    -Capital/Labour/Raw Materials/Factories
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7
Q

Long Run time frame of firms DESCRIBE

A

When quantities of all imputs are variable!!!

THIS LOOKS DIFFERENT FROM FIRM TO FIRM

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8
Q

How can a firm increase output in the short run?

A

INCREASE THE AMOUNT OF LABOUR EMPLOYED >3

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9
Q

What three concepts descirve the realtionship between output and the quantity of labour employed?

A
  1. TOTAL PRODUCT
  2. MARGINAL PRODUCT
  3. AVERAGE PRODUCT
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10
Q

Total product

A

the total output produced in a given period

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11
Q

Marginal product of labour

A

is the increase in output that arises from an additional unitof labour empoyed, with all other inputs remaining the same

q2-q1/labour 2-labour1

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12
Q

Average product of labour

A

is equal to total product divdied by the quantity of labour employed

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13
Q

As the quantity of labour employed increases,

Total Product?
Marginal product?
Average product?

A

TOTAL PRODUCT INCREASES and decreases
marginal produce INCREASES AND THEN EVENTUALLY DECREASES
Average product increases initially but eventually decreases

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14
Q

What does the total product curve look like?

A

INCREASES WITH THE AMOUNT OF LABOUR INCREASES

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15
Q

What is the Total Product curve similar to

A

Similar to the PPF because it shows the attainable output levels from unattainable output levels in the short run

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16
Q

Marginal Product Curve

A

Initially increases because the marginal product of one worker exceeds the marginal product of the previous worker

(increasing marginal returns nnc SPECIALIZATION)

EVENTUALLY decreases because of diminishing marginal returns property (each extra worker has less access to capital and space!!)

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17
Q

What is the law of idminishing returns?

A

When fixed inputs has a set quantity, but vbl inputs incerase, the marginal product of the vairable input will eventually decrease!

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18
Q

Average Product Curve

A

This is closely related to the MARGINAL PRODUCT CURVE

When MPC>APC, APC rises
When MPC=APC, APC at maximum
When MPC<APC, APC falls

SAME RELATION WITH AVERAGE TOTAL COST CURVE

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19
Q

How can firms produce more outputs in the short run??

A

Employ more labour= which means costs must increase

3 TYPES OF COST:
-TOTAL
-MARGINAL
-AVERAGE

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20
Q

Total Cost

A

Fixed Cost+ VBL Cost= Total Cost

FIXED= always constant even if output changes
VBL= changes as output changes

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21
Q

Fixed Cost curve
VBL cost curve
Total cost curve

visualizations and logic

A

Always decreasing L shape, because the more labour the bigger the denom

U shapes Curved and increases as output increases

HIGHEST UP LINE IS TOTAL COST

Why is TC highest up? because you add VBL and fixed to get it

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22
Q

Is total cost ever zero?

A

NO you have to at least pay fixed costs

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23
Q

Marginal Cost

A

Increase in total cost that results from one unit increase in total product

MC= CHANGE IN TOTAL COST/CHANGE IN QUANTITY

24
Q

Marginal cost curve, when does it rise and when does it fall?

A

Over output with increasing marginal returns, it falls as output increases

Over output with diminishing marginal returns, it rises as output rises

25
Q

Marginal cost curve, when does it rise and when does it fall?

A

Over output with increasing marginal returns, it falls as output increases

Over output with diminishing marginal returns, it rises as output rises

LAW OF DIMININGS RETURNS

26
Q

Average Cost, versions

A

Average Fixes Cost
Average vbl cost
average total cost

ALL FORMULAS: (type of Cost)/Quantity

27
Q

Average total cost formula

A

Average fixed cost + avg vbl cost

or

Total cost/Quantity

28
Q

Average Fixed Cost curve visual

A

Downward sloping- fixed costs fall when output increases

29
Q

Average Vbl cost curve visual

A

U shaped, because MP exceeds AP, whcih bring rising AP and falling AVC

SLOPES UPWARD BECAUSE OF DIMINISHING RETURNS!!! AVC slopes upward and AVC incerases more quickly then ever!!

30
Q

Average Total Cost curve, visual

A

U shaped, it is the vertical sum of AFC and AVC,

U SHAPED BC WHEN AVC Rises more quickly than AFC is decreasing!!!

31
Q

Which curve is the most special

A

Marginal Cost curve!

32
Q

MC curve quirks

A

Outputs where AVC is fallin, MC is below Average Vbl Cost// when ATC is falling, MC is below ATC

For outputs over whcih AV is rising, MC is ABOVE AVC// when ATC is rising, MC is above ATC

for outputs at the minimum AVC MC=AVC!!!// when minimum ATC=MC

33
Q

How are product and cost curves related?

A

THEY ARE THE EXACT OPPOSITE!!!!

When marginal cost is at minimum, marginal product is at maximum,

When marginal product rises, marginal cost falls

Average variable cost is minimum when Average product curve is at maximum

When average product rides, average variable cost is falling

34
Q

what is true about the long run?

A

ALL COSTS AND INPUTS ARE VARIABLE!!

35
Q

Long run average cost curve

A

Shows the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed

It is like a cloud outline; you pick the output you wanna produce and see which curve you hit first!!

36
Q

Economies of Scale

A

features of a firm’s tech that leads to falling long run average cost as output increases

37
Q

DisEconomies of Scale

A

features of a firms tech that lead to rising long run avg cost as output increases

38
Q

Constant returns to scale

A

features of a firms tech that lead to constant long run avg cost as output increases

39
Q

Do firms all experience Economies/diseconomies/constant returns

A

NO! always experience economies of scale upto some output level; but after that either diseconomies of scale or constant returns!!

40
Q

Minimum efficient Scale???

A

smallest quantity of output at which the long run avg cost reaches the lowest level

41
Q

Can marginal product of a worker be negative?

A

YES! careful!

42
Q

REVIEW ALL THE FORMULAS!!!

A

YES PLEASE

43
Q

Production Function and Total Cost function

A

They are inverses of each other and rooted in LAW OF DIMINISHING MARGINAL PRODUCT

Production function (as labour increases, the amount produced decreases and the curve goes up great but flattens out)

Total cost curve (as labour increases cost slowly increase till it goes up exponentially bc a lot of wages!!!)

44
Q

WHAT UNITS ARE THESE:
average total cost
average fixed cost
average vbl cost
marginal cost

A

total cost per UNIT
fixed cost per UNIT
vbl cost per UNIT
extra cost for 1 extra UNIT

45
Q

Shape of average fixed cost

A

declining slope, this shows that over time, fixed costs decrease!!

46
Q

Shape of average variable cost

A

U-shaped because at first the variable cost average decreases, but eventually they increase!!

47
Q

Shape of average total cost

A

U shaped because AFC and AVC are fighting for dominance!! It will be higher up than either curve!

48
Q

When marginal cost curve is beginning to rise what does this indicate

A

Diminishing marginal product- the cost of one extra unit produced is becoming more expensive!

49
Q

Does marginal cost curve immediately go upwards?

A

NO! first it slopes down and then goes up

50
Q

Why is the LRAC curve ATC u-shaped?

A

because at first economies of scale occuring (firm knows that it is cheaper to mass produce, so quantity is being increased while costs decline)

then there is a constant return of scale happening (the amount being produce is resulting in a same amount of cost)

then there is a diseconomies of scale (cheaper to produce less)

51
Q

Average total cost curve relation to marginal cost curve

A

1) when MC<ATC, ATC is decreasing
2) when MC=ATC, ATC is at minimum level
3) when MC>ATC, ATC is rising

52
Q

Average product curve shape

A

LIKE it goes up and then slopes down think like a radical graph

53
Q

Minimum efficient scale

A
  • the lowest possible production quantity where long-run average cost is at its lowest level

this is where ATC curve is at its’ minimum

54
Q

Over the output range with increasing marginal returns, marginal cost
——as output increases.

Over the output range with diminishing marginal returns, marginal
cost —– as output increases.

A

falls
rises

55
Q

The larger the plant

A

THE larger is the output where average total cost curve is at minimum

56
Q

MOST EFFICIENT AND MOST CHEAP POINT OF PRODUCTION

A

MIN EFFICIENCT SCALE= MIN POINT OF ATC CURVE

Econ (20 decks)

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