Chapter 8 MIDTERM 2 Flashcards
What is the difference between short run and long run production
short run has at least one fixed variable,
Long run has to consider all factors as variables
think: you’ll only worry about that truck 10 years from now, youll worry about gas tomorrow tho.
what is the term to describe the long term goal of profit maximizing firms?
What is technical efficiency?
long term goal: be technically efficient.
Technical efficiency is to produce efficiently at minimized costs (rather than with the goal of maximizing profits at all times). no more of all inputs than necessary (labour)
LONG RUN COST MINIMZATION FORMULA?
MPk/pk = X,
MPl/pl = X2;
If X > X2, X is the answer
you choose to use the marginal spending on that will produce the most output.
or MPk/MPl = pk/pl
Profit Maximizing firms adjust the _______ they use to the market prices of the factors
quantities of factors
Firms will change ______ _ _______ if the relative prices of factors change. Relatively more of the cheaper factor and relatively less of the more expensive factor will be used.
methods of production
What is the term coined for the minimum achieveable cost for each level of output in $ form?
What is its shape?
What does it represent/what is it’s purpose
LRAC Curve:
Long Run Average Cost Curve
“saucer” shaped
Boundary between cost levels that are attainable, with known technology and given factor prices, those that are unattainable
When output is increasing and COSTS ARE DECREASING at a rate greater than input during firm expansion, LRAC _____ (declines,increases)
line Declines.
and Returns increase
economies OF SCALE
what is MES?
What does it represent for the LRAC curve?
Constant Costs
MES: minimum efficient scale; smallest level of output at which LRAC reaches its minimum
Both INputs and Outputs are increase in EXACT proportion to each other.
When output is Decreasing and COSTS ARE INCREASING at a rate greater than input during firm expansion, LRAC _____ (declines,increases)
line inclines
Returns decrease
diseconomies of scale
What is the relationship between long run and short run cost curves?
How do the lines match up on a graph?
no short run cost curve can fall below the long-run cost curve bc LRAC = lowest attainable cost for each output
SRATC is tangent at some point to LRAC
What happens to LRAC curve in the VERY long run
Changes in tech leads to improvements thus the Curve shifts downwards and typically decreases in costs
what is the measure of productivity?
the measure of output produced per input used
why are new inventions and innovations important for the development of the economy?
The invention of new production techniques and the development of new and better inputs are important aspects of technological improvement. They lead to reductions in firms’ costs and a downward shift in LRAC curves.
Substitute away vs innovate away
Innovate: attempt to find a new solution, develop new technology to improve production that’ll set the firm miles above competition
Subsitute away: outsource labour to cheaper alternatives such as robotery or cheap labour countries
how to know whether to employ more kapital or more labour
mpk > mpl = employ more capital
mpk < mpl = use more labour
