7: Producer Theory Flashcards
isoquant shapes for returns of scale
constant returns
- spaced evenly
increasing returns
- closer together as we move away from the origin
decreasing returns
- further apart as we move away from the origin
technical rate of substitution
rate at which the producer can swap out inputs while maintaining the same level of output/reaching the same level of production as before
slope of isoquants
- convexity of isoquants implies diminishing TRS
constant returns to scale
if you scale up each factor of production by a constant proportion, you get the same proportionate increase in output as the proportion by which you scaled up the input
when does a firm shut down in the short run?
p < AVC
when does a firm shut down in the long run?
p < AC
profit-maximising point
MC = MR
MR and P for a producer in a perfectly competitive industry
MR is the constant/unchanging P
choice of output has no impact on price
- if they produce more, it is just sold at the market price
effects of fixed cost F on short-run and long-run production
in the short run, F has no effect on optimal choice
- when we maximise profit with respect to quantity of output, fixed cost plays no role and doesn’t change with quantity
- fixed cost is sunk and has to be paid in the short run no matter the quantity
- MR=MC becomes p=MC and F doesn’t affect MC since it doesn’t change with output
in the long run, F tells us whether the producer stays in the industry as it impacts economic profit
- if economic profit is negative, producer wants to exit and stops producing
- if economic profit is positive, producers produces at profit-maximising output
- large F leads to shut down and 0 production in the long run but small F leads them to stay
production function
most output the firm can get from a given combination of inputs
marginal product
how much output increases when we increase the amount of an input
slope of the production function
diminishing marginal product
each extra unit of input brings less and less output
long run vs. short run
long run defined as the time when all factors of production can be varied
short run when at least one factor of production must be used in a fixed amount
slope of isoprofit lines
w/p
cost-minimising choise
TRS=w1/w2 (price of inputs)
marginal cost
change in cost given a small change in output
