question
what are the two basic elements of production theories?
answer
1. inputs
2. outputs
2. outputs
question
inputs
answer
-any and all resources a firm uses to produce its outputs
- the resource used to produce the outlet
- the resource used to produce the outlet
question
outputs
answer
the items the firm sells
- independent variable
- what the firm produces to sell
- sold to consumers, other firms, and government
- independent variable
- what the firm produces to sell
- sold to consumers, other firms, and government
question
4 input types
answer
1. land and natural resources
2. labor
3. capital
4. entrepreneurial ability
2. labor
3. capital
4. entrepreneurial ability
question
3 ways outputs can be used
answer
1. a pure consumer good
2. purely a capital input
3. can function as either a consumer or good
-many outputs can function as inputs
2. purely a capital input
3. can function as either a consumer or good
-many outputs can function as inputs
question
production function
answer
links input usage to the level of output produced
question
production function formula
answer
q=f(L,K)
- q: output
- L: amount of labor
- K: capital
- f: function
- q: output
- L: amount of labor
- K: capital
- f: function
question
short run
answer
- a period in which at least one input is fixed and unalterable
- take K as fixed
- take K as fixed
question
short run example
answer
the owners have signed a lease for the a space and they're fixing the inputs and making them unchangeable--the period of the lease would define their short run
question
fixed input
answer
- in the example, location and the size would be an example of a fixed input
- it is in the nature of capital goods to be difficult to alter and to be largely responsible for creating the short run
- it is in the nature of capital goods to be difficult to alter and to be largely responsible for creating the short run
question
variable input
answer
for example, the amount of raw hamburger meat, the number of buns, and so on
- an input
- an input
question
long run
answer
- a period in which all inputs are variable
- "a year or less"
- good rule of thumb
- "a year or less"
- good rule of thumb
question
the economic definitions are based on what?
answer
a characteristic holding true; either at least one input is fixed or all inputs are alterable
question
marginal product of labor
answer
- MP
- the extra output produced b an extra worker
- the extra output produced b an extra worker
question
MP formula
answer
MP>l=(△q/△L)
question
law of diminishing product
answer
- at some point the extra output produced by the use of an extra worker starts to fall
- as more workers are used, the contribution is greater output ultimately beings to decline
- would not appear until a large number of workers was reached
- as more workers are used, the contribution is greater output ultimately beings to decline
- would not appear until a large number of workers was reached
question
fixed costs
answer
- FC
- do not change when output change
- stem directly from the fixed inputs the firm uses
- only short run concept
- do not change when output change
- stem directly from the fixed inputs the firm uses
- only short run concept
question
example of fixed costs
answer
rent
question
variable costs
answer
- VC
- costs that do vary with output
- any variable input the firm uses gives rise to a variable costs
- costs that do vary with output
- any variable input the firm uses gives rise to a variable costs
question
total costs
answer
- TC
- the sum of payments made to both fixed and variable input
- the sum of payments made to both fixed and variable input
question
TC formula
answer
TC=FC+VC
question
average costs
answer
- AC
- another way product costs can be framed
- cost divided by the amount of output being produced
- referred to as per unit costs
- another way product costs can be framed
- cost divided by the amount of output being produced
- referred to as per unit costs
question
average fixed costs
answer
- AFC
formula: AFC=(FC/q)
formula: AFC=(FC/q)
question
average variable costs
answer
- AVC
- formula: AVC= (VC/q)
- formula: AVC= (VC/q)
question
fact about variable costs
answer
the major difference is that the value of the variable costs changes as the level of output changes
question
what is the shape of the average variable cost?
answer
"U" shape
question
average total costs
answer
- ATC
- the total costs divided by output
- the total costs divided by output
question
ATC formula
answer
- two equivalent ways of expressing average total costs
- ATC=(TC/q)=(FC+VC/q)=(VC/q)+(FC/q)=AFC+AVC
- ATC=(TC/q)=(FC+VC/q)=(VC/q)+(FC/q)=AFC+AVC
question
what is the difference between ATC + AVC?
answer
- must be equal to AFC
- not constant
- not constant
question
what shape does AVC + ATC have in common?
answer
"U" shaped
question
marginal costs
answer
- MC
- formula: MC=(△TC/△q)
- amounts to the extra costs incurred to produce another unit of the good; the change in total costs when there is a change in production
- formula: MC=(△TC/△q)
- amounts to the extra costs incurred to produce another unit of the good; the change in total costs when there is a change in production
question
inverse relationship between marginal production and marginal costs formula
answer
MC=w/MP
question
2 features for the MC curve
answer
1. as the marginal cost curve is falling, both average cost curves are also falling
2. the marginal cost curve reaches its minimum value and begins to rise
3. the marginal cost curve starts to rise rapidly
2. the marginal cost curve reaches its minimum value and begins to rise
3. the marginal cost curve starts to rise rapidly
question
2 types of time horizon
answer
1. short run
2. long run
2. long run
question
division of labor specialization
answer
- MP is getting larger from the 1st worker to the 10th worker
- the extra worker is producing more than the previous worker
- the extra worker is producing more than the previous worker
question
3 average cost formulas
answer
1. AFC=(FC/q)
2. AVC=(VC/q)
3. ATC=(TC/q)=AFC+AVC
2. AVC=(VC/q)
3. ATC=(TC/q)=AFC+AVC
question
goal of the firm formula
answer
π=TR-TC
- π: results from the difference between the revenues the firm collects and the total costs the firm accumulates
- π: results from the difference between the revenues the firm collects and the total costs the firm accumulates
question
total revenues
answer
- TR
- equals the price the firm charges for its output times the amount of output produced
- equals the price the firm charges for its output times the amount of output produced
question
explicit costs
answer
- EC
- the payments the firm makes to the inputs listed in the production function
- can be either fixed or variable in nature
- direct payments to inputs
- the payments the firm makes to the inputs listed in the production function
- can be either fixed or variable in nature
- direct payments to inputs
question
implicit costs
answer
- IC
- the opportunity costs the owners of the firm
- the opportunity costs the owners of the firm
question
distinction between explicit and implicit costs
answer
results in 2 alternative measures of profit
1. accounting profits
2. economic profits
1. accounting profits
2. economic profits
question
accounting profits
answer
- results when one subtracts all the explicit costs a firm incurs from the total amount of revenues collected by the firm
question
accounting profit formula
answer
Accounting π=TR-EC
- TR: total revenue
- EC: explicit costs
- TR: total revenue
- EC: explicit costs
question
economic profits
answer
- found by subtracting both explicit and implicit costs from the revenues the firms earns
question
economic profit fomrula
answer
economic π=TR-EC-IC,
- TR: total revenue
- EC: explicit costs
- IC: input costs
- TR: total revenue
- EC: explicit costs
- IC: input costs
question
normal profit
answer
economic profits are zero
question
4 factors or characteristics define a perfectly competitive industry
answer
1. many buyers and sellers, each of which is so small as to be unable to affect the market price
2. all firms produce identical output
3. entry into the industry is free (free entry & exit)
4. the market contains perfect information (no one can be fooled)
2. all firms produce identical output
3. entry into the industry is free (free entry & exit)
4. the market contains perfect information (no one can be fooled)
question
what is the goal of the firm?
answer
If
TR= total revenue
= p-q
then
π= profit
= TR-TC
TR= total revenue
= p-q
then
π= profit
= TR-TC
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