question
Production
answer
turning stuff (inputs) into other stuff (outputs)
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Production Function
answer
-relates to the amount of inputs you use to the maximum amount of output you could make with those inputs
-producer's constraint
Y = f (K , L)
-producer's constraint
Y = f (K , L)
question
Marginal Product (of the input)
answer
-slope of the production function
-rate at which you can turn input into output
-depends on technology
-rate at which you can turn input into output
-depends on technology
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Diminishing Returns
answer
-the extra output you get from each unit of input gets smaller as you add more and more of it
-the marginal product of the input is decreasing
-the marginal product of the input is decreasing
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Average Product/Productivity (of input)
answer
the average product of the input (productivity); for example, Y/L would be 'output per unit of labor'
question
Isoquants
answer
-lines that show different combinations of inputs that produce the same amount of output
-slope of an isoquant tells us the technical rate of substitution/marginal rate of technical substitution
-slope of an isoquant tells us the technical rate of substitution/marginal rate of technical substitution
question
Industrial Organization
answer
how the type of product affects the structure of its industry
*market structure
*technology
*market structure
*technology
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Profit Maximization
answer
-common assumption to model producers as if they want to maximize profit (equivalent to cost minimization)
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Profit
answer
-profit = π
π= Revenue−Cost =R−C
π= Revenue−Cost =R−C
question
Automation
answer
machines vs. people
ex: artificial intelligence
(slide 19/60)
ex: artificial intelligence
(slide 19/60)
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Marginal Revenue & Marginal Cost
answer
- if MR>MC, you should produce extra stuff!
- if MR<MC, you should produce less stuff!
-to predict choices of a profit-driven producer, look for where MR=MC
- if MR<MC, you should produce less stuff!
-to predict choices of a profit-driven producer, look for where MR=MC
question
Fixed Costs
answer
constant costs that must be paid by the producer regardless of how much output is produced
(ex: insurance, rent...)
(ex: insurance, rent...)
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Variable Costs
answer
Costs that depend on how much output is produced
(ex: packaging, wages, commission...)
(ex: packaging, wages, commission...)
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Accounting Profit vs. Economic Profit
answer
Accounting Profit: about explicitly incurred costs
Economic Profit: also accounts for implicit opportunity cost
Economic Profit: also accounts for implicit opportunity cost
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Marginal Cost
answer
-change in cost if you were to produce a little more
-doesn't include fixed costs since they don't change when you produce more
-doesn't include fixed costs since they don't change when you produce more
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Average Cost
answer
-total cost divided by the amount you produce: C/Y
-includes fixed costs
-includes fixed costs
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Average Variable Cost
answer
total variable part of your costs divided by the amount you produce
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Profit Margin
answer
π=R−C
π/Y=R/Y−C/Y
π/Y=R/Y−C/Y
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Profit per unit of production
answer
average revenue - average cost
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Long Run
answer
the time when all inputs can be varied
(all costs are variable)
(all costs are variable)
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Short Run
answer
when at least one input must be used in a fixed amount
(there are fixed costs)
(there are fixed costs)
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Returns to Scale
answer
long-run concept about what happens when we scale up ALL inputs in the same proportion
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Decreasing Returns to Scale
answer
average cost rising as output is increased
(ex: if we increase all inputs by 10%, we get less than 10% more output)
(ex: if we increase all inputs by 10%, we get less than 10% more output)
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Constant Returns to Scale
answer
average cost constant as output is increased
(ex: if we increase all inputs by 10%, we get exactly 10% more output)
(ex: if we increase all inputs by 10%, we get exactly 10% more output)
question
Increasing Returns to Scale
answer
average cost falling as output is increased
(ex: if we increase all inputs by 10%, we get more than 10% more output)
(ex: if we increase all inputs by 10%, we get more than 10% more output)
question
Model of Perfect Competition
answer
Assumptions:
1. Price-taking: each player in the market is sufficiently small that its quantity choices don't influence the market price
2. Identical firms, homogenous goods: firms sell identical products; this is entwined with the price taking competition
3. Perfect information: all players in the market know what the good is and its price
4. Free entry and exit in the long run: firms are allowed to enter and leave the industry at will
1. Price-taking: each player in the market is sufficiently small that its quantity choices don't influence the market price
2. Identical firms, homogenous goods: firms sell identical products; this is entwined with the price taking competition
3. Perfect information: all players in the market know what the good is and its price
4. Free entry and exit in the long run: firms are allowed to enter and leave the industry at will
question
p = MC
answer
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