Chapter 4 Flashcards
(22 cards)
The mathematical statement that describes the process whereby productive inputs are transformed into outputs of goods and services
It illustrates how different combinations of inputs yield a specific level of output.
What is the production function?
The maximum amount of output that can be produced from a given set of inputs
It is the basis for calculating marginal and average products.
Define Total Product (TP).
The change in the total product from a one-unit change in an input
It measures the additional output gained by adding one more unit of a specific input.
What does Marginal Product (MP) measure?
By dividing total product by the quantity of the input used
It provides a measure of overall input efficiency.
How is Average Product (AP) calculated?
As more of a variable input is added to a fixed input, the marginal product of the variable input will eventually decline
This explains why adding more of one input leads to smaller increases in output.
What does the Law of Diminishing Returns state?
Any resource for which the quantity cannot be changed during the period of analysis
Capital is often considered a fixed input in the short-run.
What is a Fixed Input?
Any resource for which the quantity can be changed during the period of analysis
Labor is typically a variable input.
Define Variable Input.
A period of time in which at least one input in the production process is fixed
Managers can only adjust variable inputs during this period.
What characterizes the Short-Run?
A period of time in which all inputs are variable
This allows firms to adjust all factors of production.
Define Long-Run in production terms.
Shows all possible combinations of two inputs that can be purchased for a given total cost
It represents the cost constraint for producers.
What is an Isocost Curve?
Shows all possible efficient combinations of two inputs that can produce the same level of output
The slope of an isoquant is the marginal rate of technical substitution.
Define Isoquant.
The portion of an isoquant that has a negative slope
It indicates efficient input combinations for production.
What is the Economic Region of Production?
The curve that connects all the cost-minimizing input combinations for different levels of output
It shows how a firm’s optimal input mix changes as output increases.
Define Expansion Path.
The long-run change in output resulting from a proportionate change in all inputs
This concept is crucial for long-run planning.
What are Returns to Scale?
A situation where a proportionate increase in all inputs results in the same proportionate increase in output
Average cost of production remains constant.
What are Constant Returns to Scale?
A situation where a proportionate increase in all inputs results in a more than proportionate increase in output
Often leads to economies of scale.
Define Increasing Returns to Scale.
A situation where a proportionate increase in all inputs results in a less than proportionate increase in output
Can lead to diseconomies of scale.
What are Decreasing Returns to Scale?
Occur when an increase in the scale of production causes average total cost to decline
Cost advantages arise from increased production volume.
What are Economies of Scale?
Occur when an increase in the scale of production causes average total cost to increase
Often due to management difficulties.
Define Diseconomies of Scale.
Occur when the cost of producing two or more outputs jointly is less than the cost of producing them separately
Explains why firms might diversify their product lines.
What are Economies of Scope?
The relationship between cumulative output and the average amount of a variable input required to produce a unit of output
Illustrates that average cost tends to decrease with increased production.
What does the Learning Curve describe?
As managers and workers gain experience in manufacturing a product, the average cost of production declines
Highlights the importance of accumulated experience in reducing costs.
What is the Learning Curve Effect?
