question
What is the budget line equation
answer
• rearranged budget constraint formula in terms of y
• y = (m)/(Py) - [(Px)/(Py)]*X
• y = (m)/(Py) - [(Px)/(Py)]*X
question
Define factors of production
answer
land, labor, capital, raw materials all things to produce a thing
question
What are capital goods?
answer
The factories and machines used to make goods
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What is financial capital?
answer
money and assets
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what is physical capital
answer
all human-made goods that are used to produce other goods and services; tools and buildings
question
describe technological constraints
answer
only a certain combination of input are feasible ways to produce a given amount of output, the firm must limit itself technologically to account for this
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production function
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the relationship between quantity of inputs used to make a good and the quantity of output of that good
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production set
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the set of technically feasible combinations of inputs and outputs
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what is the isoquant
answer
an isoquant is the set of all possible combinations of inputs 1 and 2 that are just sufficient to produce a given amount of output
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what is an indifference curve
answer
a curve that shows consumption bundles that are just sufficient to produce a certain amount of utility
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what is the difference between isoquants and indifference curve
answer
isoquants are labelled with the amount of outputs they can produce, not with a utility level
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fixed proportions production
answer
Production in which one, and only one, ratio of inputs can be used to produce a good
question
perfect subsitutes
answer
two goods with straight-line indifference curves
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Cobb-Douglas production function
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A production function that assumes some degree of substitutability among inputs.
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monotonic
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A pattern of association in which the value of cases on one variable increases or decreases fairly regularly across the categories of another variable
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free disposal
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if the firm can costlessly dispose of any inputs, having extra inputs around can't hurt it
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marginal product
answer
the increase in output that arises from an additional unit of input
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Technical Rate of Substitution
answer
the rate at which a firm will have to substitute one input for another in order to keep output constant
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law of diminishing marginal product
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The observation that after some point, successive equal-sized increases in a variable factor of production, such as labor, added to fixed factors of production will result in smaller increases in output.
question
diminishing technical rate of substitution
answer
as we increase the amount of factor 1, and adjust factor 2 so as to stay on the same isoquant, the technical rate of substitution declines
question
constant returns to scale
answer
the property whereby long-run average total cost stays the same as the quantity of output changes
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Returns to scale
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rate at which output increases as inputs are increased proportionately
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decreasing returns to scale
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when long-run average total cost increases as output increases
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Profits
answer
Revenues minus costs.
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opportunity cost
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the idea that if you are using your labour in one application you forgo the opportunity to use that same labor elsewhere
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fixed factor
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an input whose quantity cannot be changed in the short run
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variable factor
answer
an input whose quantity can be changed over the time period under consideration
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quasi-fixed factors
answer
factors of production that must be used in a fixed amount, independent of the output of the firm, as long as the output is positive (e.g if the firm produces zero output, it doesnt have to provide any lighting but if it produces any positive amount of output, it has to purchase a fixed amount of electricity to use for lighting)
question
profit maximization
answer
The firm chooses the input and output combination that lies on the highest isoprofit line.
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Comparative Statics
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the comparison of economic outcomes before and after some economic variable is changed
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factor demand curve
answer
measures the relationship between the price of a factor and the profit-maximizing choice of that factor
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inverse factor demand curve
answer
measures what the factor prices must be for some given quantity of inputs to be demanded
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cost minimization
answer
a firm's goal of producing a specific quantity of output at minimum cost
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conditional factor demand functions
answer
measure the relationship between the prices and output and the optimal factor choice of the firm, conditional on the firm producing a given level of output, y
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derived factor demand
answer
the demand for a factor that is derived from the demand for an output being produced
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Weak Axiom of Cost Minimization (WACM)
answer
the assumption that if a firm is always choosing the cost-minimizing way to produce y units of output, then its choices at times t and s must satisfy these inequalities:
• (w'^t)(x'^t) + (w"^t)(x"^t) ≤ (w'^t)(x'^s) + (w"^t)(x"^s)
• (w'^s)(x'^s) + (w"^s)(x"^s) ≤ (w'^t)(x'^s) + (w"^t)(x"^s)
KEY
• two sets of prices during different times: (w'^t, w"^t) and (w'^s, w"^s)
• w: price of inputs
• y: output
• x: input (factor)
• "If the price of factor 1 increases, then this inequality implies that the demand for factor 1 should decrease."
• If WACM is violated, it probably means that the firm chose an inefficient input bundle that isn't cost minimizing.
• (w'^t)(x'^t) + (w"^t)(x"^t) ≤ (w'^t)(x'^s) + (w"^t)(x"^s)
• (w'^s)(x'^s) + (w"^s)(x"^s) ≤ (w'^t)(x'^s) + (w"^t)(x"^s)
KEY
• two sets of prices during different times: (w'^t, w"^t) and (w'^s, w"^s)
• w: price of inputs
• y: output
• x: input (factor)
• "If the price of factor 1 increases, then this inequality implies that the demand for factor 1 should decrease."
• If WACM is violated, it probably means that the firm chose an inefficient input bundle that isn't cost minimizing.
question
short-run cost function
answer
A function that defines the minimum possible cost of producing each output level when variable factors are employed in the cost-minimizing fashion.
question
long run cost function
answer
the minimum cost of producing a given level of output, adjusting all of the factors of production
question
sunk cost
answer
a cost that has already been committed and cannot be recovered (e.g. you decide to lease an office for a year, you are obligated to pay it no matter the output you produce)
question
what cost function measures the minimum costs of producing a given level of output at given factor prices
answer
the average fixed costs decrease as output is increased and the average variable costs eventually increase as output is increased, the combination of these two effects produces a u shaped average cost curve
question
what is the fixed costs function and what is the average costs function
answer
average variable costs plus average fixed costs, Average fixed costs always decline with output, while average variable costs tend to increase. The net result is a u shaped average cost curve
question
average cost curve
answer
variable cost
question
convert the cost funtion c(y) = y^2 +1 into the following derived cost curves
answer
summarized by the production function. there are only certain feasible combinations of inputs and outputs
question
Marginal costs for a firm with two plants.
answer
how profit motive influences media products and company structures
question
Click-cost curve
answer
the quantity each firm can sell and the price it can obtain are constrained by its customers' willingness to pay and by the prices and marketing efforts of other firms. it can only sell as much as people are willing to buy
question
Long-run marginal cost
answer
a company's target customers, the buying influences that shape the behavior of those customers, and competitors that market similar products to those customers, describe the ways firms respond to each other when they make their pricing and output decisions
question
the relationship between the long-run and short-run marginal costs with continuous level of fixed factors
answer
the market structure that exists when there are many small businesses selling one standardized product
question
what are average costs composed of
answer
the cost of producing one extra unit
question
What does the area under the marginal cost curve measure
answer
...
question
technological constraint
answer
where supply = demand
question
economic constraints
answer
In an industry with free entry, profits will eventually be driven to 0, since it is so easy to enter and any positive profit chances will be taken immediately
question
Market Constraints
answer
Economic rent is defined as those payments to a factor of production that are in excess of the minimum payment necessary to have that factor supplied.
question
market environment
answer
undefined
question
pure competition
answer
undefined
question
The demand curve facing a competitive firm
answer
undefined
question
Marginal Cost and Supply
answer
undefined
question
Average variable cost and supply
answer
undefined
question
Draw the industry supply curve
answer
undefined
question
industry equilibrium
answer
undefined
question
draw the industry supply curve with free entry
answer
undefined
question
what is the meaning of zero profits
answer
undefined
question
economic rent
answer
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