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ECON102 > Week 5 - Producer theory > Flashcards

Week 5 - Producer theory Flashcards

1
Q

What are producer assumptions?

A
  1. the firm produces a single good
  2. the firm has already chosen which product to produce
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2
Q

What is the producers goal?

A

profit maximisation/ cost minimisation

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3
Q

What causes inputs through production to become?

A

outputs

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4
Q

What is the profit equation?

A

Profit = Total Revenue (TR) - Total Cost (TC)

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5
Q

What are the production inputs?

A

labour and capital

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6
Q

What is output for production?

A

q

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7
Q

What is the production function?

A

q = f(L, K)

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8
Q

What are assumptions of production functions?

A

the more inputs the firm uses the more output it makes

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9
Q

What are included in production functions?

A

inputs, outputs

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10
Q

What are the production functions an analogy of?

A

the utility functions

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11
Q

What is variable input (labour)?

A

inputs that can be changed in the short run

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12
Q

What is fixed input (capital)?

A

inputs that cannot be changed in the short run

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13
Q

What decision making are there for producers in the short run?

A

some inputs are variable, some fixed

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14
Q

What decision making are there for producers in the long run?

A

all inputs are variable

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15
Q

What does the difference between short run and long run inputs mean?

A

firms have more flexibility in the long run than in the short run

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16
Q

What is fixed in short run production decisions?

A

capital

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17
Q

What is marginal product of labour (MP_L)?

A

the additional output the firm can produce by using an additional unit of labour (keeping the capital fixed)

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18
Q

How do you calculate the MP_L?

A

MP_L = df (K, L)/ dL

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19
Q

What is diminishing marginal product of labour?

A

as a firm hires additional units of labour, the marginal product of labour falls

eg even hundred of workers will make little progress digging a hole if they have no shovel to dig with

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20
Q

What are the long run production decision?

A
  1. there is a trade off between L and K (comparing trade off between pizza and coke)
  2. Isoquants (comparing to indifference curves)
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21
Q

What is the rate of which the consumer is willing to trade off between two consumptions of pizza and coke such that they can maintain the same utility level?

A

MRS (marginal rate of substitution)

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22
Q

What is the rate of which the producer is willing to trade off between capital and labour so they can maintain at the same output level?

A

marginal rate of technical substitution

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23
Q

What is the marginal rate of technical substitution (MRTS_L,K)

A

the rate at which the firm can trade capital for one more unit of labour, holding the output constant

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24
Q

What is the marginal rate of technical substitution (MRTS_L,K) equation?

A

MRTS_L,K = MP_L / MP_K

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25
Q

What is the production function of the marginal rate of technical substiution?

A

Cobb-Douglas production function

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26
Q

What is an isoquant?

A

a curve which shows what combination of inputs (labour, capital) can be used to produce a given level of output

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27
Q

Indifference curves in comparison to isoquant curves

A

Both downward sloping and cannot intersect one another

Look similar but indifference curves represent utility and preference

in the production theory we use isoquant curves to represent the production function

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28
Q

What is the slope of the isoquant referred to as?

A

the MRTS (marginal rate of technical substitution)

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29
Q

What is the x and y axis of the cobb-douglas production function graph?

A

inputs on the axis

labour - x axis
capital - y axis

curves represent the level of output

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30
Q

What does output (q) depend on?

A

capital (K) and labour (L) according to a relationship:

q = (K^a)(L^b)

(cobb-douglas form)

31
Q

What does it mean the higher the isoquant curve?

A

the higher the output level

32
Q

What is isoquant with the word broken down?

A

iso = equal
quant = quantity

33
Q

What is the output level on each of the isoquant curves?

A

on each of the curves the quantity is the same

34
Q

What do isoquant curves represent?

A

the production functions of a firm, the output that has been generated from the different combinations of capital and labour

on one curve, the output level remains the same across different combinations of capital and labour

35
Q

How do you get a positive MRTS?

A

take the negative of the slope of the isoquant (MRTS) since the curve is downward sloping, two negatives make a positive

(will get a positive answer from the MRTS formula anyways)

36
Q

Isoquant special cases:
What does the graph look like when Labour (L) and Capital (K) are perfect complements?

A

L - x axis
K - y axis

Look like right angled line (L shape)

if eg labour is fixed you cannot increase output even if you increase the capital used

only way to increase output level is to shift capital and labour together, going from one isoquant to the next one

Leontief production function

37
Q

Isoquant special cases:
What does the graph look like when Labour (L) and Capital (K) are perfect substitutes?

A

L - x axis
K - y axis

downward sloping line

eg one worker to replace a machine

38
Q

What is returns to scale?

A

a change in the amount of output in response to a proportional increase of the inputs

39
Q

When does a production function have a constant returns to scale?

A

if changing the amount of capital and labour by some multiple changes the quantity of output by exactly the same multiple. (Doubling labour and capital doubles output)

40
Q

When does a production function have a increasing returns to scale?

A

if changing the amount of capital and labour by some multiple changes the quantity of output more than proportionally. (Doubling labour and capital more than doubles output)

41
Q

When does a production function have a decreasing returns to scale?

A

if changing the amount of capital and labour by some multiple changes the quantity of output less than proportionally. (Output doesnt fully double when inputs are doubled)

42
Q

What is technology change (total factor productivity growth)

A

an improvement in technology that changes the firms production function such that more output is obtained from the same amount of inputs

43
Q

What is the technology change (total factor productivity growth) equation?

A

Q = Af (k, L)

44
Q

What is the total cost equation?

A

Total cost = fixed cost + variable cost

45
Q

What is important about capital in the short run?

A

it is fixed

46
Q

What are the short run cost functions?

A

Total cost
Fixed cost
Variable cost

47
Q

Where does the fixed cost come from in the short run?

A

it comes from the fixed input (aka capital), cannot change capital in the short run

unit price of capital is r (rental rate)

48
Q

What are examples of rental rate?

A

rental rate of machines, the factory, borrowing money from the banks (pay interest)

49
Q

Where does the variable cost come from in the short run?

A

comes from variable input (labour)

capital is fixed so can only hire more labour (cost changing with the level of output)

unit price of labour is w (wage rate)

50
Q

What is the shape of total costs on a graph determined by?

A

the law of diminishing product in the short run

51
Q

Explain this example of a Total cost function in the short run

TC = 50 + 50q - 10q^2 +3q^3

A

the part that isnt changing with the output level (fixed cost)
-> 50

50q - 10q^2 +3q^3 is the variable cost part because of changes in q (output)

52
Q

How is average cost calulated?

A

AC = Total Cost (TC) / q (output)

53
Q

What is marginal cost?

A

cost of producing another unit of output

54
Q

How do you calculate marginal cost?

A

MC = d TC / d q

(the same as differentiating the Average Cost equation)

55
Q

What does the MC and AC curve look like?

A

MC is the nike tick
AC is a U shape

MC intersects AC at the lowest point

56
Q

Where does MC intersect the AVC curve?

A

the MC also intersects AVC at the minimum of AVC

57
Q

What does a firm choose to maximise production efficiency in the long run?

A

chooses K and L

58
Q

What is cost minimisation?

A

economically efficient input combination for a given quantity

59
Q

What does the long run cost function look like?

A

Cost: r x K + w x L

r= rental/ interest rate
K = per unit price of capital
w = unit price of wage

60
Q

What is an isocost line?

A

shows what combinations of the two inputs can be employed for a given cost

labour x axis
capital y axis

Straight downward sloping line
Represents different combination of capital and labour cost firm eg 1 million

61
Q

What does it mean the isocost line is closer or further to the origin?

A

the cost is smaller, the further away the cost is greater

62
Q

What happens to the isocost line if there is an increase in the cost of labour (wages)

A

it pivots the isocost line and makes it steeper (so stays in the same place of labour and capital point moves down)

63
Q

What does it tell us when putting isoquants and isocost lines together?

A

how cheaply it is possible to produce a given level of output and what is the best combination of inputs to use. The key point is at tangency between a given isoquant and the lowest attainable isocost line

64
Q

What is the Marginal rate of technical substitution equation in cost minimisation?

A

MRTS = w/r

65
Q

What can firms vary the amount they employ in the long run, what can they then do?

A

capital, shift onto different short run cost curves

owing to economies of scale and subsequent diseconomies of scale

66
Q

What do different short run cost curves make?

A

a long run average cost curve (an envelope around short run average cost curves)

in the long run you jump along different short run curves

67
Q

Why do long run average costs initially fall?

A

owing to economies of scale and may eventually rise owing to diseconomies of scale

68
Q

Where does the long run marginal cost curve pass through on the long run average cost curve?

A

the minimum of the average cost curve

69
Q

What type of economies of scale does doubling output causes costs to less than double?

A

a firm has economies of scale
(Total cost rises at a slower rate than output rises)

70
Q

What type of economies of scale does doubling output causes costs to more than double?

A

a firm has diseconomies of scale
(Total cost rises at a faster rate than output rises)

71
Q

What type of economies of scale does doubling output causes costs to double?

A

a firm has constant economies of scale
(Total cost rises at the same rate as output rises)

72
Q

What 3 things may economies of scale be due to?

A
  1. fixed costs
  2. specialisation
  3. quality of machinery
73
Q

What 2 things may diseconomies of scale be due to?

A
  1. managerial diseconomies/ bureaucracy
  2. geographical diseconomies

ECON102 (8 decks)

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