week 5

Question 1

what does the demand curve show

Answer 1

consumers utility maximisation
income and substitution effects

Question 2

what does the supply curve show

Answer 2

firms decisions

Question 3

what is producer theory

Answer 3

assumes that a firm produces a single good and the firm has already chosen which product to produce
aims to maximise profit and minimise cost

Question 4

how do you calculate profit

Answer 4

total revenue - total cost

Question 5

what are the inputs and outputs for production

Answer 5

inputs - labour (L) and capital (K)
outputs - q
the more the firm inputs, the more output it makes

Question 6

what is the production function

Answer 6

q = f(L,K)

Question 7

what is the short run

Answer 7

some inputs are variable, some inputs are fixed
variable input (labour) - can be changed in the short run
fixed input (capital) - cannot be changed in the short run

Question 8

what is the long run

Answer 8

all inputs are variable
gives firms more flexibility

Question 9

what is the marginal product of labour (MPL)

Answer 9

the additional output the firm can produce by using an additional unit of labour (keeping capital fixed)

Question 10

how do you calculate MPL

Answer 10

∂f (K,L) / ∂L

Question 11

what is the diminishing marginal product of labour

Answer 11

as a firm hires additional units of labour, the marginal product of labour falls

Question 12

what are the long run production decisions

Answer 12

trade offs between L and K
isoquants

Question 13

what are isoquants

Answer 13

an envelope which shows what combinations of inputs (labour and capital) can be used to produce a given level of output
curves cannot intersect one another
as output rises, move further from origin

Question 14

what is the equation for output

Answer 14

q = K^α x L^β

Question 15

what are the two special examples of isoquants

Answer 15

Question 16

what is the marginal rate of technical substitution

Answer 16

rate at which the firm can trade labour for capital, holding the output constant

Question 17

how do you calculate MRTS

Answer 17

MRTS L,K = MPL / MPK
negative slope of the isoquant is MRTS

Question 18

what are returns to scale

Answer 18

change in the amount of output in response to a proportional increase of inputs

Question 19

how do you have constant returns to scale

Answer 19

if changing the amount of capital and labour by some multiple changes the quantity of output by exactly the same multiple
doubling labour, doubles capital

Question 20

how do you increase returns to scale

Answer 20

if changing the amount of capital and labour by some multiple changes the quantity of output more than proportionally
doubling labour more than doubles output

Question 21

how do you decrease returns to scale

Answer 21

if changing the amount of capital and labour by some multiple changes the quantity of output less than proportionally
output does not double when inputs are doubled

Question 22

what is total factor productivity growth

Answer 22

technology change is an improvement in tech that increases the firms production function such that more output is obtained from the same amount of inputs
Q = Af (K,L)

Question 23

how do you calculate total cost

Answer 23

fixed cost + variable cost

Question 24

what determines the shape of the total cost curve

Answer 24

the law of diminishing marginal product in the short run

Question 25

what is average cost

Answer 25

total costs / output

Question 26

what is marginal cost

Answer 26

cost of producing another unit of output

Question 27

how do you calculate marginal cost

Answer 27

MC = dTC/ dq

Question 28

how do you calculate average variable cost

Answer 28

AVC = VC / q

Question 29

what is long run cost minimisation

Answer 29

firms choose K and L to maximise production efficiency
cost minimisation - economically efficient input combination for a given q

Question 30

what are isocost lines

Answer 30

shows what combinations of the two inputs can be employed for a given cost
increase in cost of labour makes line steeper
increase in cost of capital makes the line flatter

Question 31

what does plotting isoquants and isocost lines on the same graph mean

Answer 31

tells you how cheaply it is possible to produce a given level of output, and what is the best combination of inputs to use
the tangent between the isoquant and isocost line shows lowest possible cost combination of inputs

Question 32

what are economies of scale

Answer 32

if doubling output causes cost to less than double
total cost rises at a slower rate than output rises

Question 33

what are diseconomies of scale

Answer 33

if doubling output causes cost to more than double
total cost rises at a faster rate than output rises