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firm
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any org that urns inputs into outputs
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production function
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the mathmatical relationship btw inputs and outputs
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marginal product of labor
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the change in output from hiring one additional unit of labor
the derititiave of the production function with respect to L, K is held constant- partial deritiave
the derititiave of the production function with respect to L, K is held constant- partial deritiave
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marginal product
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the additional output that can be produced byadding one more unit of a particaluar input while holding all other inputs constant, diminishing marginal product -
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average product
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the average amount produced by each unit of a variable factor of production
declines with MPL
misleading in how productive an extra worker is
declines with MPL
misleading in how productive an extra worker is
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isoquant
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a curve that shows the various combinations of inputs that will produce the same amount of an output
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Marginal Rate of Technical Subsitution (RTS)
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the amt by which one input can be reduced when one more unit of another input is added while holding output constant
the negative slope of an iqoauant
the amt by which capital input can be reduced while holding quantity produced when one or more unit of labor is used
rate of substitution of labor for capital = RTS (of l for k) = -slope of isoquant = -changes in capital input. changes nin labor input = MPl/MPK
q is held constant!!! depends on the level of put and the quantities of capital and labor being used
the negative slope of an iqoauant
the amt by which capital input can be reduced while holding quantity produced when one or more unit of labor is used
rate of substitution of labor for capital = RTS (of l for k) = -slope of isoquant = -changes in capital input. changes nin labor input = MPl/MPK
q is held constant!!! depends on the level of put and the quantities of capital and labor being used
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if mpl =2, and MPk =1 itnerpert the meaning of RTS
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means that if the firm employs one more worker, they will generate two extra units of output if capital input remains capital
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can RTS be negative?
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yes, but it means that mraginal products would be negative 0 which no firm would pay for anything that is negative
thus, RTS must be postive and the slope of the isoquant negt
thus, RTS must be postive and the slope of the isoquant negt
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diminishing RTS
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isoquants are convex curves
High ratio of K to L - RTS is a large postive numberm indicating that a great deal of capital must be given up if one more unit is employed
when low ratio- small amt of capital to be given up
High ratio of K to L - RTS is a large postive numberm indicating that a great deal of capital must be given up if one more unit is employed
when low ratio- small amt of capital to be given up
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constant returns to scale
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doubling of all inputs yields precise doubing of output
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decreasing returns to scale
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Doubling of all inputs results in less than doubling of output
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increasing returns to scale
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when output increases more than in proportion to an increase in all inputs
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fixed proporations production function
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isoquants are L shaped
machines and labor must be used in fixed proportions
machines and labor must be used in fixed proportions
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technical progress
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a shift in the production function that allows a given output level to be produced using fewer inputs
represents a real saving on inputs and a reduction in the costs of production
represents a real saving on inputs and a reduction in the costs of production
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economic costs
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the amount required to keep an input in its present use; the amount that it owuld be worth in its next best alternative use
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accounting cost
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the concept that inputs cost what was paid for them
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opportunity cost
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the cost of a good as measured by the alternative uses that are foregone by producing the good
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wage rate
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the cost of hiring one worker for one hour
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sunk cost
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expenditure that has been made and cannot be recovered
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rental rate (v)
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the cost of hiring one machine for one hour
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economic profit
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total revenue minus total cost
Pf(K,L) -wL+ rK
Pf(K,L) -wL+ rK
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TC
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wL + rK
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TR
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p*Q
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cost minimization necessary condition
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Marginal rate of technical subistion RTs of L for k = W/v
Mpl/MPk = W/R = Mpl/W MPk/ R
at the margin, inputs get the same bang for the buck from each kind of input hired
Mpl/MPk = W/R = Mpl/W MPk/ R
at the margin, inputs get the same bang for the buck from each kind of input hired
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expansion path
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the set of cost minmizing input combinations a firm will choose to produce various levels of output when the prices of inputs are held constnat
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TC and Constant returns to scale
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TC has a straight line
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TC and Decreasing returns to scale
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slight curve that is convex
larger quantites of inputs are required to increase output, input costs rise rapdily as outut expands
larger quantites of inputs are required to increase output, input costs rise rapdily as outut expands
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TC and Increasing Returns to scale
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sucessive inputs requiremtns decline as otuput expands
concave , cost advantages for large scale operations
concave , cost advantages for large scale operations
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optimal scale
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low levels of output = underutilized
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average cost
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TC/ Q
common measure of cost per unit
common measure of cost per unit
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Marginal Cost
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the additional cost of producing one more unit of output
Change in TC/change in Q
only measures at athe margin
Change in TC/change in Q
only measures at athe margin
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AC/MC and Constant Returns to Scale
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has a steady, flat line
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AC/MC Decreasing returns to scale
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MC is greater than AC
MC is increasing - the cost of one more unit is becoming greater
MC is increasing - the cost of one more unit is becoming greater
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AC/MC increasing returns to scale
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AC is greater than MC
MC falls, along iwth AC
MC falls, along iwth AC
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Optimal Scale
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point at which MC= AC is the optimal point
these are U shaped
these are U shaped
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short run
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the period of time in which a firm mist consider some inputs to be fixed in making its decisions
capital in the short run is fixed
capital in the short run is fixed
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long run
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the period in time which a firm may consider all of its inputs to be variablein making its decisions
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fixed costs
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costs associated with inputs that are fixed in the short run
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variable cost
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costs associated with inputs that can be varied in the short run
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cost minimization for short run
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AC = MC = SACK= SMC K
short run has a greater cost than long run costs
short run has a greater cost than long run costs
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economies of scope
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Reductions in the costs of one product of a multiproduct firm when the output of another product is increased.
may cause cost curves to shift - some firms produce more than one product
expanding scope of operations
may cause cost curves to shift - some firms produce more than one product
expanding scope of operations
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marginal revenues
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the extra reveneu a firm receives when it sells one more unit of output
= P (1+ 1/price elasticity) = deritive of TR with respect to q = A/B -21/b
when outputs are LESS than Qstar = MR> MC
more: MR< MC
= P (1+ 1/price elasticity) = deritive of TR with respect to q = A/B -21/b
when outputs are LESS than Qstar = MR> MC
more: MR< MC
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price taker
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a firm or individual whose decisions regarding buying or selling have no effect on the prevailing market price of a good
MR = P
profits = TR - TR = PQ- STCq
MR = P
profits = TR - TR = PQ- STCq
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Downward sloping demand curve and P
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MR < P
firms must reduce their prices to sell more if their products
MR curve will lie belwo the market demand curve
firms must reduce their prices to sell more if their products
MR curve will lie belwo the market demand curve
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price elasticity of demand
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the percentage change in quantity demanded relative to a percentage change in price
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when elasticity is less than -1
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Elastic demand curve
MR > 0
MR > 0
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when elasticity = -1
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Unit elastic
MR = 0
MR = 0
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when elasticity is greater than -1
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MR < 0
inelastic
inelastic
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marginal revenue curve
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A curve showing the relation between the quantity a firm sells and the revenue yielded by the last unit sold. Derived from the demand curve.
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shifts in demand and marginal curves
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shifts in demand causes shift
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firm's short run supply curve
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the part of MC curve above AVC
the relationship btw price and quantity supplied by a firm in the short run
postively sloped portion of the short run MC = short run supply curve
the relationship btw price and quantity supplied by a firm in the short run
postively sloped portion of the short run MC = short run supply curve
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shut-down price
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the price below which a firm will choose to exit the market because it is not able to cover its fixed costs
- minimim avg variable cost
- minimim avg variable cost
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when n =1
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constant returns to scale w
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when n >1
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increasing returns to scale e
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when n <1
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decreasing returns to scale
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