WEEK 5 Flashcards
What is the goal of production
Profit maxing
Cost minimization
What is the profit formula
Profit = total revenue - total cost
Assume what in producer theory
Firm makes one good
Firm picked that good
more inputs,more outputs
In the short run
Labour is variable
Capital is fixed
In the long run
All inputs are variable
What is marginal product of labour
Additional output a frim produces by using another unit of labour
How to find MPL
differentiating the production function
What is the product function
an equation with Y as Q and X as L and K
As a firm gets more labour what happens
MPL drops
What is an isoquant
A graph which shows what combinations of inputs can make different outputs
What are isoquant key features
Downwards sloping
convex curves
Cannot intersect
Output rises where in isoquants
Further away from the origin
What is q in the production function
Output
What is K in the production function
Capital
What is L in the production function
Labour
How to solve cobb-douglas functions
Sub the powers in then the K and L in to find q
What is the marginal rate of technical substitution
The rate at which the frim can trade labour for capital, holding the output constant
What is the equation for MRTS
Marginal production of labour / Marginal production of capital
When does a production function have constant returns to scale
if changing capital and labour by a multiple changes output by a multiple
When does a production function have increasing returns to scale
If changing capital and labour by a multiple and changes output by a higher multiple
When does a production function have decreasing returns to scale
If changing capital and labour by a multiple changes output by a lower amount
How do we find total costs
Fixed cost + variable cost
What comes into fixed costs
Capital - rental rate (r)
What comes into variable costs
Labour - wage rate (w)
how to find marginal costs
TC differentiated
How to find average costs
TC / q
What is AVC
Average variable costs
How to find AVC
Variable costs / q
The smaller elasticity means
more sensitive to price changes
the larger the elasticity means
Less sensitive to price changes
In the long run firms choose
K and L to maximize production efficiency
What is cost minimization
Economically efficient input combination for a given q
What is an isocost line
An isocost line shows what combinations of the two inputs can be employed for a given cost
An increase in the cost of labour does what
Pivots the isocost line and makes it steeper
What happens if an increase in labour happens on the graph
Shifts left
An increase in the cost of capital does what
makes the slope flatter - shifts the line down
What is the Y and X in isoquant and isocost lines
Y = capital
X = labour
What does isoquant mean to isocost lines
The isocost is the budget line for costs
Where is the best combination of inputs found
Where the tangent is between a given isoquant and lowest attainable isocost line
When are costs minimized
MRTS = w/r
in the long run firms can do what
shift onto different short run cost curves
What does the long run average cost curve look like
An envelope around short run average cost curves
When does a firm have economies of scale
If doubling output causes cost to less than double
When does a firm have diseconomies of scale
if doubling output causes cost to more than double
When does a firm have constant economies of scale
If doubling output causes cost to double
