Unit 6: Theory of the Firm Flashcards
Firm
organization that brings together factors of production to produce a commodity which is sold for a profit
Short-run
period of tine during which at least one input is fixed, flexibility is somewhat restricted
Long-run
period of time during which all inputs can be varied, it is long enough to make a complete change
Law of variable returns
describes how the output of production process changes when you keep increasing one variable input while holding the supply of another input is fixed.
States that given one at least one factor fixed factor input and one variable factor input, as additional units of the VFI are added, total product increases but with a diminishing rate
Law of diminishing returns
if an increased number of one factor input is combined with a fixed supply of another, there will be a less-than-proportionate increase on output (MP falls)
Average product
number of units producer per variable factor input
formula: TP/L
Marginal product
refers to the extra output that is produced by adding one more unit of a specific input while keeping other inputs constant.
formula: change in TP/change in L
Inflection point
point at which TP stops increasing at an increasing pace and starts increasing at a diminishing rate
Why do returns vary?
returns vary as long as there is a fixed factor input and hence, L:K ratio varies
Stages of production
- Positive, increasing returns
- Positive, diminishing returns
- Zero returns
- Negative returns
Costs
what firms incur to produce a commodity
Implicit cost
opportunity cost
Explicit cost
cost actually paid
Total fixed costs (TFC)
independent on the number of units produced i.e. exogenous, these are unavoidable costs. It is illustrated by a horizontal graph
Total variable costs (TVC)
dependent on the number of units produced, costs increase directly with output. Such costs are avoidable
