Week 8: Production Theory and Cost Theory Flashcards
Total Revenue:
The amount firms receive in a sale
Total Cost:
The amount spent on inputs
Profit:
Total revenue-cost
Cost:
All resources have a opportunity cost
Explicit costs:
opportunity cost of resources that take the form of a cash payment e.g. computers, equipment
Implicit costs:
- doesn’t have an explicit monetary value
Economic Profit:
Total revenue - total cost - implicit costs, factor in the next best alternative
Production Theory:
looks at the relationship between outputs and the inputs necessary for the production of that output.
Short Run Production Theory
At least one of the factors of production are fixed - typically capital
e.g. manufacturing firm can vary its labour quite quickly, but it takes a long time to increase its capital (build a new factory)
Law of Diminishing Marginal Returns:
Law of diminishing returns show what happens to output when we add units of input to production
Holding capital constant, output will increase by increasingly large amounts (increasing returns)
After some point, add more labour will still increase output, but by smaller and smaller amounts (diminishing returns).
E.G. art room, hiring more people up to certain amount increase productivity -> less work for 1 person to do
after a while law of diminishing marginal returns, as does not need that many ppl but it still helps
after a while hiring more will be useless and can decrease production, as they get in the way etc, more efficient if less people do it.
Is a law as, output must eventually increase by smaller and smaller amounts when added to the fixed factor.
Marginal Product
Slope of total product curve = marginal product curve
Increasing marginal returns: marginal product curve rising
Decreasing marginal returns: marginal product curve falling
Negative marginal returns: goes negative
Production In the Long Run
All factors of production can be changed
Law of diminishing returns does not apply, as no constraints from the fixed factor.
