week 5 Flashcards
what does the demand curve show
consumers utility maximisation
income and substitution effects
what does the supply curve show
firms decisions
what is producer theory
assumes that a firm produces a single good and the firm has already chosen which product to produce
aims to maximise profit and minimise cost
how do you calculate profit
total revenue - total cost
what are the inputs and outputs for production
inputs - labour (L) and capital (K)
outputs - q
the more the firm inputs, the more output it makes
what is the production function
q = f(L,K)
what is the short run
some inputs are variable, some inputs are fixed
variable input (labour) - can be changed in the short run
fixed input (capital) - cannot be changed in the short run
what is the long run
all inputs are variable
gives firms more flexibility
what is the marginal product of labour (MPL)
the additional output the firm can produce by using an additional unit of labour (keeping capital fixed)
how do you calculate MPL
∂f (K,L) / ∂L
what is the diminishing marginal product of labour
as a firm hires additional units of labour, the marginal product of labour falls
what are the long run production decisions
trade offs between L and K
isoquants
what are isoquants
an envelope which shows what combinations of inputs (labour and capital) can be used to produce a given level of output
curves cannot intersect one another
as output rises, move further from origin
what is the equation for output
q = K^α x L^β
what are the two special examples of isoquants
what is the marginal rate of technical substitution
rate at which the firm can trade labour for capital, holding the output constant
how do you calculate MRTS
MRTS L,K = MPL / MPK
negative slope of the isoquant is MRTS
what are returns to scale
change in the amount of output in response to a proportional increase of inputs
how do you have constant returns to scale
if changing the amount of capital and labour by some multiple changes the quantity of output by exactly the same multiple
doubling labour, doubles capital
how do you increase returns to scale
if changing the amount of capital and labour by some multiple changes the quantity of output more than proportionally
doubling labour more than doubles output
how do you decrease returns to scale
if changing the amount of capital and labour by some multiple changes the quantity of output less than proportionally
output does not double when inputs are doubled
what is total factor productivity growth
technology change is an improvement in tech that increases the firms production function such that more output is obtained from the same amount of inputs
Q = Af (K,L)
how do you calculate total cost
fixed cost + variable cost
what determines the shape of the total cost curve
the law of diminishing marginal product in the short run
what is average cost
total costs / output
what is marginal cost
cost of producing another unit of output
how do you calculate marginal cost
MC = dTC/ dq
how do you calculate average variable cost
AVC = VC / q
what is long run cost minimisation
firms choose K and L to maximise production efficiency
cost minimisation - economically efficient input combination for a given q
what are isocost lines
shows what combinations of the two inputs can be employed for a given cost
increase in cost of labour makes line steeper
increase in cost of capital makes the line flatter
what does plotting isoquants and isocost lines on the same graph mean
tells you how cheaply it is possible to produce a given level of output, and what is the best combination of inputs to use
the tangent between the isoquant and isocost line shows lowest possible cost combination of inputs
what are economies of scale
if doubling output causes cost to less than double
total cost rises at a slower rate than output rises
what are diseconomies of scale
if doubling output causes cost to more than double
total cost rises at a faster rate than output rises
