Week 3 Flashcards
What’s the short run?
The period of time in which quantities of one (usually capital) or more factors of production can’t be changed.
What’s the long run?
All factors of production become variable.
What are the nine assumptions about producer behaviour?
The firm in question only produces a single good.
The firm has already chosen what good to produce.
The firm seeks to minimise costs.
The firm only uses two generic inputs capital (K) and labour (L).
The more inputs a firm employ’s, the more output it produces.
In the short run, labour can be changed but capital is fixed.
Production exhibits diminishing marginal returns to L and K.
The firm can buy as much capital and labour as it wants.
The firm doesn’t have a budget constraint.
What’s the average product of labour?
The productivity of a firm’s labour in terms of how much, on average, each worker can produce.
APl = Output / Labour Input
What’s the marginal product of labour?
Marginal product of labour is the additional output that’s produced when labour is increased by one unit.
MPl = Change in Output / Change in labour input
What’s an isoquant?
A curve representing all combinations of inputs that allow a firm to produce a particular quantity of output.
What’s the negative of the slope of the isoquant called?
The marginal rate of technical substitution (MRTS) - The amount by which the for can trade input X for input Y, whilst holding output constant
What’s the formula for the MRTS?
MRTSlk = -(Change in K / Change in L) = (MPL/MPK)
For perfect substitutes, MRTS is constant
For perfect complements, there is no substitution between inputs.
What are returns to scale?
Constant RTS – isoquants are equally spaced out.
Increasing RTS – isoquants become closer together.
Decreasing RTS – isoquants get further apart.
How is the slope of an isocost determined?
It’s equal to the negative ratio of the two input prices.
What’s the least-cost combination?
Mathematically, the cost-minimising point is where the slope of the isoquant is equal to the slope of the isocost?
What’s economic welfare and its two component parts?
Economic welfare is maximised at equilibrium and is a measure of wellbeing. It’s split into two component parts:
Consumer surplus – exists whenever the price a customer would be willing to pay is greater than what they actually pay.
Producer surplus – exists when the price a producer would be prepared to supply at is less than the actual market price.
When is efficiency achieved?
Efficiency is achieved where the total surplus received by economic agents is maximised.
What are the assumptions of perfect competition?
There are many buyers and sellers in the market.
Firms sell homogenous goods.
There are no barriers to entry or exit.
Economic agents have complete information.
Individual firms are “small” and “insignificant”.
They are “price takers”.
How do economists measure a firm’s economic profit?
Total revenue minus total cost, including both explicit and implicit costs.
