Flashcards in 2023 Test 2 Deck (64):
What is the definition of Factors of Production?
Resource inputs used to produce goods and services
What are the Four Basic Factors of Production?
Land, Labor, Capital, Entrepreneurship are?
What is a production function?
A technological relationship expressing the maximum quantity of a good attainable from different combinations of factor inputs.
What is the purpose of a production function?
Tells us just how much output we can produce with varying amounts of factor inputs(Labor and Capital)
What is the general principle of production?
The productivity of any factor depends on the amount of other resources available to it.
(you can have 8 sewing machines, but if there are no workers it produces nothing)
What is efficiency?
Getting maximum output of a good from the resources used in production.
(A production function represents technical efficiency, that is, the most output attainable from any given level of factor inputs)
What is the "short run"
The time period during which some productivity resources cannot be changed.
What cannot be changed in the "short run". What can?
Fixed Input(cannot be changed):
a. Factory Size cannot be changed.
b. Capital Equipment cannot be changed
Variable Input(can be changed):
What is the short-run objective of a business owner?
The short-run objective is to make the best possible use of the factory acquired by selecting the right combination of labor and capital which once decided cannot be changed in the short run.
What is Marginal Physical Product(MPP)?
The change in total output from adding one more unit of input(labor).
In formula: MPP = Change in total output ÷ Change in input quantity,
What does the law of diminishing returns say?
The marginal physical product will keep diminishing even as total output is going up as more labor input is added in a given production setting (same land and capital crowded by more workers).
What is productivity?
The output per unit of input - for example, output per labor-hour.
What is profit?
The difference between total revenue and total cost.
Does maximum profit coincide with maximum output?
No. Maximum output could yield losses if the cost is greater than the revenue for example if the demand is not high enough or additional units cost too much,
What is Marginal Cost(MC)?
The change/increase in total cost from producing one more unit of output.
In formula: MC = Change in total cost ÷ Change in output
What is the relationship between marginal physical product and marginal cost
Whenever MPP is increasing, the marginal cost of producing a good must be falling.
If marginal physical product declines, marginal cost increases.
(full explanation on page 143)
What is total cost?
Includes the market value of ALL resources used in its production including Fixed Costs and Variable Costs.
Formula: Total Cost = Fixed Costs+Variable Costs
What are Fixed Costs?
Costs of production that don't change when the rate of output is altered such as rent, utilities, equipment fees. There is no way to avoid fixed costs in the short run.
What are Variable Costs?
Costs that change with the level of output produced. If we don't need to produce much we can lower working hours, buy less material etc. and vice versa.
What determines how fast total cost rises?
How fast total costs rise depends on variable costs only.
Why is there is no upper limit to a firm’s Total Cost in the short run?
Because you can hire more and more workers and drive total costs sky-high even if you've reached the output limit since you still have the same amount of equipment.
Why is there a lower limit to a firm’s Total Cost in the short run? As a part of your answer, be sure
identify WHAT this lower limit is!
There is a lower limit because there is still fixed costs. There’s no way to avoid fixed costs in the short run.
What is Average Total Cost(ATC)?
The Total cost divided by the quantity produced in a given time period. *It measures the cost to produce the "typical unit" of output.*
In formula: ATC = Total cost ÷ Total Output
or ATC = AFC + AVC (if we have those)
The shape of a ATC line is a parabola.
What is Average Fixed Costs(AFC)?
Total Fixed cost ÷ Quantity produced (in a given time period)
AFC line keeps going down as more output is produced because the fixed cost is spread over more output.
What is Average Variable Costs(AVC)?
Total Variable cost ÷ Quantity produced (in a given time period)
While AVC drops up to a certain amount of output, is begins to rise quickly due to diminishing returns in production process.
What is Marginal Cost(MC)?
The inscrease/change in total costs associated with producing one more unit of output.
In formula: Change in total cost ÷ change in output
Diminishing returns in production cause marginal costs to increase as the rate of output is expanded. The shape of it looks like the Nike logo.
What is the relationship between average total cost (ATC) and marginal cost (MC)?
the MC curve intersects the ATC curve at its lowest point (point m). Thus average total costs decline as long as the marginal cost curve lies below the average cost curve
What are Explicit Costs? How do you obtain the costs.
A payment made for the use of a resource. They are the Accounting costs. Create a paper trail. To get explicit costs, add up all of the costs together.
What are Implicit Costs? Name the implicit costs of starting a firm.
The value of resources used, even when no direct payment was made.
a. Use of personal savings
b, Use of personal property
c. Labor services payments from another job given up
Extra: Leisure hours that are given up
How do you obtain Accounting Profit(or Loss)?
Formula: Total Revenue - Account Cost
What is Economic Cost?
Formula: Explicit Costs + Implicit Costs
What is Economic Profit(or Loss)?
Formula: Total Revenue - Economic Costs
Real world business decisions are based on Economic profits and losses.
What are the Economic Measure of Success with Economic Profit.
Above-Normal Economic profit: when TR > Econ. Cost
Normal Economic Profit: when TR = Econ. Cost
Economic Loss: When TR < Econ. Cost
What is the "long run"?
A period of time long enough where all inputs can be changed. Therefore all costs are variable costs. There are no fixed costs.
What is a Long-Run Average Total Cost Curve(LRATC)?
A curve from ATC curves that summarizes our best short-run possibilities.
What is Economies of Scale?
Reductions in minimum average costs that come about through increases in the size(scale) of plant and equipment.
Why would a larger firm might attain a lower minimum average total cost than a smaller firm?
Centralizing: reduces average costs.
More room for bigger/better machinery.
What is Diseconomies of Scale?
loss in minimum average costs when increasing factory size. Efficiency and size don’t necessarily go hand in hand
What is Unit Labor Costs?
The hourly wage divided by output per labor-hour.
In formula: Wage rate ÷ MPP
Labor is “cheap” only if?
it produces a lot of output in return for the wages paid, meaning the Unit Labor Cost is smaller.
A worker’s productivity (MPP) depends on?
depends on the quantity and quality of other resources in the production process.
What does the law of demand tell us?
The quantity of a good demanded in a given time period increases as its price falls, ceteris paribus.
What is a demand curve and what does it tell us?
A downward sloping curve describing the quantities of a good a consumer is willing and able to buy at alternative prices in a given time period, ceteris paribus. It tells us the direction of the consumer response to a price change.
What is price elasticity of demand?
The response of consumers to a change in price is measure by this formula:
% change in quantity demanded ÷ % change in price
What is Total (Sales) Revenue?
The price of a product multiplied by the quantity sold in a given time period?
In formula: Price per unit X quantity sold
What does Price Elasticity of Demand tell us?
Tells us the size of the consumer response to a price change.
When does a product have Elastic demand?
When there is a large quantity response when the price changes. Meaning consumers buy A LOT MORE when the price falls, and A LOT LESS when the price rices.
When does a product have Inelastic demand?
When there is a small quantity response to a price change. Meaning consumers only buy a little less when the price rises and a little more when it falls.
What are the Determinants of Elasticity?
1. # of available substitutes: If many substitutes, it is elastic, it few inelastic.
2. % of income spent on the product: If large % Elastic, if small % inelastic
3. "Type" of product: Meaning if luxury, elastic. If necessity, inelastic.
4. Length of adjustment time to price change: if short, inelastic, if long, elastic.
What is it called when the Elastic Demand is 1?
Called Unitary Demand.
What do the % changes look like in the Elastic Demand formula when a product is Elastic?
% in Qd is relatively big, % in P is relatively small.
What does a demand curve look when a product is Elastic?
Demand curve looks "flat", looks like easy to climb.
What does a demand curve look when a product is Inelastic?
Demand curve looks very "steep" and hard to climb.
In Economics, what do we say is the goal of a business owner?
Goal to maximize Total Profit or minimize total loss.
What is Total Profit?
Total Revenue - Total Cost
If a product is Inelastic demand, what price change would be best, why?
Best to raise price since it will be a small change in Qd and the firms Total Revenue increases.
If a product is Elastic demand, what price change would be best, why?
Best to lower prices since it will be a large change in Qd.
Explain how productivity advances impact global competitiveness
These advances keep shifting production functions upward: more can be produced with any given quantity of inputs.
Why did President Clinton want to increase the tax on cigarettes?
Tax revenues would help finance the health care reforms the president so dearly wants.
What did the White House assume would happen to cigarette sales in response to a 10%
He thought it would quadruple the tax revenue.
Over a three-year period, what did Becker claim would happen to cigarette sales in response
to a 10% price increase?
Over a three-year period, cigarette consumption is likely to decline by 8 percent for every 10 percent increase in price
Why was it important for the White House to “get the math right”?
Because this would greatly affect tax revenue for healthcare the president wanted.
For a given product, describe how the price
elasticity of demand coefficient changes as we move toward the “southeast” along the product’s
At very high prices, demand is more elastic, as you move down the demand curve it becomes more inelastic.