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Production
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Production transforms inputs into outputs.
-For instance, producing automobiles requires a variety of inputs (also called factors of production): raw materials (steel, plastic, rubber, and so on), factories, machines, land, and many different categories of workers.
-For instance, producing automobiles requires a variety of inputs (also called factors of production): raw materials (steel, plastic, rubber, and so on), factories, machines, land, and many different categories of workers.
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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
-The firm's production function indicates the maximum level of output the firm can produce for any combination of inputs.
-Q=F(L,K)
-The firm's production function indicates the maximum level of output the firm can produce for any combination of inputs.
-Q=F(L,K)
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short run
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the period of time during which at least one of a firm's inputs is fixed
-In the short run, one or more of the firm's inputs is fixed, that is, they cannot be varied.
-In the short run, one or more of the firm's inputs is fixed, that is, they cannot be varied.
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long run
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the time period in which all inputs can be varied
-In the long run, the firm can vary all of its inputs.
-In the long run, the firm can vary all of its inputs.
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fixed inputs (fixed costs)
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Factors of production that do not change with changes in the firm's level of output
Ex: rent, insurance
-Inputs that cannot be changed in the short run are called fixed inputs.
Ex: rent, insurance
-Inputs that cannot be changed in the short run are called fixed inputs.
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variable input
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Any resource for which the quantity can change during the period of time under consideration
-labor is a variable input; that is, the firm can freely vary its number of workers.
-labor is a variable input; that is, the firm can freely vary its number of workers.
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marginal product
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the increase in output that arises from an additional unit of input
-This marginal product is the additional output produced by an additional unit of labor, all other inputs held constant.
-This marginal product is the additional output produced by an additional unit of labor, all other inputs held constant.
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Marginal Revenue Product
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the change in total revenue associated with one additional unit of input
-An input's marginal revenue product is the extra revenue that results from a unit increase in the input.
-MRPl= (MR)(MPl)
-An input's marginal revenue product is the extra revenue that results from a unit increase in the input.
-MRPl= (MR)(MPl)
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Marginal cost of an input
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The marginal cost of an input is simply the amount an additional unit of the input adds to the firm's total cost.
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Returns to scale
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rate at which output increases as inputs are increased proportionately
-Returns to scale measure the percentage change in output resulting from a given percentage change in inputs.
-Returns to scale measure the percentage change in output resulting from a given percentage change in inputs.
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constant returns to scale
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the property whereby long-run average total cost stays the same as the quantity of output changes
-Constant returns to scale occur if a given percentage change in all inputs results in an equal percentage change in output.
-Constant returns to scale occur if a given percentage change in all inputs results in an equal percentage change in output.
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increasing returns to scale
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when long-run average total cost declines as output increases
-Increasing returns to scale occur if a given percentage increase in all inputs results in a greater percentage change in output.
-Increasing returns to scale occur if a given percentage increase in all inputs results in a greater percentage change in output.
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decreasing returns to scale
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when output increases less than in proportion to an increase in all inputs
-Decreasing returns to scale occur if a given percentage increase in all inputs results in a smaller percentage increase in output.
-Decreasing returns to scale occur if a given percentage increase in all inputs results in a smaller percentage increase in output.
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Output elasticity
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percentage change in output resulting from a 1% increase in all inputs
-Output elasticity is the percentage change in output resulting from a 1 percent increase in all inputs. For constant returns to scale, the output elasticity is 1; for increasing returns, it is greater than 1; and for decreasing returns, it is less than 1.
-Output elasticity is the percentage change in output resulting from a 1 percent increase in all inputs. For constant returns to scale, the output elasticity is 1; for increasing returns, it is greater than 1; and for decreasing returns, it is less than 1.
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Isoquant
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a curve that shows all the combinations of two inputs, such as capital and labor, that will produce the same level of output
-An isoquant is a curve that shows all possible combinations of inputs that can produce a given level of output.
-An isoquant is a curve that shows all possible combinations of inputs that can produce a given level of output.
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Marginal Rate of Technical Substitution
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the rate at which labor substitutes for capital without affecting output
-The marginal rate of technical substitution (MRTS) denotes the rate at which one input substitutes for the other and is defined as
-The marginal rate of technical substitution (MRTS) denotes the rate at which one input substitutes for the other and is defined as
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linear production function
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A production function that assumes a perfect linear relationship between all inputs and total output.
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Production with fixed proportions
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opposite extreme from linear production: fixed proportions allow no input in substitutions
-Production with fixed proportions is the opposite extreme from linear production; fixed-proportions production allows no input substitution.
-Production with fixed proportions is the opposite extreme from linear production; fixed-proportions production allows no input substitution.
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opportunity cost
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Cost of the next best alternative use of money, time, or resources when one choice is made rather than another
-The opportunity cost associated with choosing a particular decision is measured by the benefits forgone in the next-best alternative.
-The opportunity cost associated with choosing a particular decision is measured by the benefits forgone in the next-best alternative.
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accounting profit
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total revenue minus total explicit cost
-Accounting profit is the difference between revenues obtained and expenses incurred.
-Accounting profit is the difference between revenues obtained and expenses incurred.
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economic profit
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total revenue minus total cost, including both explicit and implicit costs
-Economic profit is the difference between revenues and all economic costs (explicit and implicit), including opportunity costs.
-Economic profit is the difference between revenues and all economic costs (explicit and implicit), including opportunity costs.
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sunk cost
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A cost that has already been incurred and that cannot be changed by any decision made now or in the future.
-A sunk cost is an expense that has already been incurred and cannot be recovered.
-A sunk cost is an expense that has already been incurred and cannot be recovered.
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Cost Function
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mathematical description of how a cost changes with changes in the level of an activity relating to that cost
-The cost function indicates the firm's total cost of producing any given level of output.
-The cost function indicates the firm's total cost of producing any given level of output.
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average total cost
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total cost divided by the quantity of output produced
-Average total cost (or simply average cost) is total cost divided by the total quantity of output.
-Average total cost (or simply average cost) is total cost divided by the total quantity of output.
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average variable cost
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Variable Cost per Unit of output.
AVC = VC / Q
AVC = VC / Q
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Constant returns to scale
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the property whereby long-run average total cost stays the same as the quantity of output changes
-Constant returns to scale means that increasing all inputs by a given percentage (say, 20 percent) increases output by the same percentage.
-Constant returns to scale means that increasing all inputs by a given percentage (say, 20 percent) increases output by the same percentage.
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economies of scale
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factors that cause a producer's average cost per unit to fall as output rises
-Production exhibits increasing returns to scale, or equivalently, economies of scale if average cost falls as the firm's scale of operation increases.
-Production exhibits increasing returns to scale, or equivalently, economies of scale if average cost falls as the firm's scale of operation increases.
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minimum efficient scale (MES)
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output range needed to bring down the cost per unit as much as possible, allowing a firm to stake out the lowest-cost position that is achievable through economies of scale
-Minimum efficient scale (MES) is the lowest output at which minimum average cost can be achieved.
-Minimum efficient scale (MES) is the lowest output at which minimum average cost can be achieved.
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shut down rule
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a firm should shut down if the price falls below the minimum AVC
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Oligopoly
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An oligopoly is a market dominated by a small number of firms, whose actions directly affect one another's profits, making the fates of oligopoly firms interdependent.
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concentration ratio
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the share of industry output in sales or employment accounted for by the top firms
-The four-firm concentration ratio, abbreviated by CR4, is the percentage of sales accounted for by the top four firms in a market or industry.
-The four-firm concentration ratio, abbreviated by CR4, is the percentage of sales accounted for by the top four firms in a market or industry.
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Effective Monopoly
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An effective monopoly is said to exist when the single-firm concentration ratio is above 90 percent, CR1 > 90.
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Effectively competitive
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A market is effectively competitive when CR4 is below 40 percent.
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loose oligopoly
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an oligopoly in which the top four firms account for 50-75 percent of the industry's total sales
-one often speaks of a loose oligopoly when 40 percent < CR4 < 60 percent
-one often speaks of a loose oligopoly when 40 percent < CR4 < 60 percent
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tight oligopoly
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An industry in which the top four firms account for 75 percent of the market sales
-a tight oligopoly when CR4 > 60 percent.
-a tight oligopoly when CR4 > 60 percent.
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Prisoner's Dilemma
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So frequent are situations (like the preceding example) in which individual and collective interests are in conflict that they commonly are referred to as the prisoner's dilemma.
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strategic substitutes
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Resources or capabilities that serve to neutralize a competitors previously effective barrier to imitation
-We say that the firms' actions are strategic substitutes when increasing one firm's action causes the other firm's optimal reaction to decrease.
-We say that the firms' actions are strategic substitutes when increasing one firm's action causes the other firm's optimal reaction to decrease.
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