week 3 Flashcards
firm
uses some technology to convert inputs into some output that is sold on the market
rational behaviour of firms assumption
to make as much money as possible
production factors
he inputs used by a firm. e.g. capital goods, labor, and raw materials
production set
the set of all feasible way to produce
production function
y = f(x)
isoquants
set of all possible combinations of inputs 1 and 2 that are just sufficient to produce a given amount of output
difference ic and isoquant
different isoquants identify different level of output and not different level of utility
monotonicity (property of technology)
if you increase the amount of at least one of the inputs, it should be possible to produce at least as much output as you were producing originally
convexity (property of technology)
if there are 2 ways to produce y units of output, (x1, x2) and (z1, z2), then their weighted average produces at least y units of output
marginal product
MP1 = ∆y / ∆x1
how much more output we would be able to produce when we add an additional unit of factor 1
monotonic property
if added 1 unit of factor 1, holding factor 2 constant the total output will increase
law of diminishing marginal product
the marginal product of a factor
will diminish as we get more and more of that factor
technical rate of substitution (TRS)
how much of factor 2 we need to add if we would like to give up a little bit of factor 1 to produce the same amount of output y
TRS function
TRS(x1, x2) = ∆x2/∆x1 = − MP1(x1,x2) / MP2(x1,x2)
diminishing TRS
as we increase the amount of factor 1, and adjust
factor 2 so as to stay on the same isoquant, the TRS declines
profit
simply defined as revenues minus costs
n
number of total outputs produced by the firm
yi
quantity of output i produced
pi
price of output i
m
number of total factors used for production
xi
quantity of factor i used
wi
proce of input i
economic definition of profit
value all inputs and outputs at their opportunity cost
fixed factor
a factor of production that is purchased in fixed amount in a unit of time
variable factor
factor of production that can be used in different amounts
isoprofit lines
all combinations of the input goods and the output good that give a constant level of profit
slope of the production function
the marginal product, and the slope of the isoprofit line is w1/p, hence MP1 = w1/p
cost minimization problem
min w1x1 + w2x2
x1,x2
Such that: f (x1, x2) = y
cost function
c(w1, w2, y)
⇒ Measures the minimal costs of producing y units of output when factor prices are (w1, w2)
isocost
all combinations of factors that cost the same amount
fixed costs
costs associated with fixed factors; need to be paid regardless of the amount of output produced
variable costs
costs associated with variable factors; Costs that change with the level of output
cost curve
visual descriptions of the various costs of production
cost function
the minimum cost of achieving a given level of output
total costs
the sum of the variable costs, cv (y), and the fixed costs, F :
c(y) = cv (y) + F
average cost function (AC)
measures the cost per unit of output
average fixed cost function (AFC)
measures the fixed costs per unit
output
average variable cost function (AVC)
measures the variable costs per unit of output
marginal cost curve
measures the change in costs for a given change in output
pure competition
A market is purely competitive if each firm assumes the market price is independent of its own level of output
maximization problem
max py − c(y)
y
