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Firm
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an organization that that transforms inputs into outputs
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production function
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the mathematical relationship between inputs and outputs
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marginal product
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the additional output that can be produced by adding one more unit, holding all other inputs constant
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Isoquants
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curves that show various combinations inputs that that produce the same amount of output
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(RTS) Marginal Rate of Technical Substitution
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The amount one input can be reduced by adding another input, holding output constant
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Returns to Scale
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The rate that output increases as a response to proportional increases in input
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opportunity cost
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(implicit cost) The value of the next best alternative
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accounting cost
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(explicit cost) Actual cost paid for inputs
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economic cost
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(implicit + explicit cost) The amount to keep a unit in its present use and the amount that input would be worth in its next best alternative use
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rental rate
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The implicit cost of capital
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sunk cost
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an expense that cannot be recoverd
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wage rate
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The amount a worker would earn at their next best alternative employment
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Owners of a firm are entitled to....
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accounting profit
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accounting profit definition
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revenue - explicit cost
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entrepreneurial cost
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the income an owner could earn at their next best alternative employment
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economic profit
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accounting profit - entrepreneurial cost (explicit + implicit cost)
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w in Economic cost Model
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wages
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v in Economic Cost Model
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value of capital
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rate of technical substitution (RTS) definition
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the amount one input can be reduced and another can be added, holding output constant
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RTS (L for K)
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w/v
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Marginal Cost
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▲TC/▲q
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In the short run a firm considers...
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some inputs to be fixed
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In the long run a firm considers...
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all inputs to be variable
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economies of scope
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expanding into one product may increase ability to produce a product in another domain
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2 types of firms, marginal revenue?
answer
price makers, price takers
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