Chapter 8 - Producers in the long run Flashcards Preview

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Flashcards in Chapter 8 - Producers in the long run Deck (36)
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1

Technical efficiency def

output/physical amount of all inputs (concerned about amount)

2

Economic efficiency def

output/value of the inputs (looking for most efficient comb of labour/capital)

3

Maximal profits go with minimal ______

costs

4

When is cost minimized

MPk/pk = MPL/pL (marginal product from capital divided by capital price = marginal product from labour divided by labour price)

5

Principle of substitution explanation

Firms adjust quantities of the factors of production in response to their changing relative prices

6

when firms use principle of substitution, we can say that they are changing their ______

methods of production

7

What is LRAC and what we see on it (2)

Long-run average cost curve. 1) Least-cost method (minimum achievable cost for each level of output)
2) Seperation of unattainable and attainable cost levels, given technology and factor prices

8

LRAC shape and 3 regions

U-shaped. 1) Falling LRAC (increasing returns to scale, decreasing costs) 2) Constant LRAC (constant returns to scale) 3) Rising LRAC (decreasing returns to scale, decreasing costs)

9

Why LRAC decreases in the beginning

Specialization (of tasks)

10

Why LRAC ends up increasing when level of output gets high (2)

1) Difficulties of managing
2) Less efficient labour (alienation of the labour force)

11

Important point on the LRAC curve

Qm : Minimum efficient Scale : Smallest level of output at which LRAC reaches its minimum

12

Decreasing returns to scale (LR) is _________ as diminishing marginal returns (short run) (reminder : point of diminish returns)

not the same !

13

What may happen to firm when output > Qm

possible increase in cost and decrease in returns to scale

14

What are returns to scale

How output of a business responds to change in factor inputs

15

When are there increasing returns to scale ?

% change in output > % change in inputs

16

When are there decreasing returns to scale ?

% change in output < % change in inputs

17

When are there constant returns to scale ?

% change in output = % change in inputs

18

What is SRATC curve and what is the relationship between LRAC and SRATC curves

short run average total cost. All SRATC curves are tangent to the LRAC curve

19

What each SRATC curve tangent to the LRAC curve represents

a fixed capital

20

What is particular about the point where a SRATC curve is tangent to the LRAC curve

It is the level of output where the firm considers optimal to use K = ... (the fixed capital for this SRATC curve)

21

Important thing about tangent point of SRATC curve on LRAC curve and who discovered that

Jacob Viner : SRATC curve isn't necessary tangent to the LRAC curve at its minimum

22

2 possible shifts of the LRAC curve and their explanation(s)

1) Upward shift : rise in factor prices
2) Downward shift : technological improvement or fall in factor prices

23

Very long run def

Length of time for a technological change

24

What technological change refers to

changes in available techniques of production

25

What is productivity

notion that is used to measure the extent of technological change

26

link that economists do between productivity and living standards

They believe that productivity growth (driven by technological change) is primary cause of rising material living standards over decades/centuries

27

Causes of productivity growth (3) and their explanation

1) Growth in capital per worker (investment in new machinery and equipement)0
2) Growth in quality of workforce (better workers produce more)
3) Growth in technological knowledge (inventing new products, changes in ways of producing things)

28

Policies to increase productivity growth (3) and their explanation

1) Policies to boost investment in new physical capital
2) Increase quality of workforce
3) Promoting technological improvements

29

how policies can boost investment in new physical capital

reducing taxes = higher return expected with investment

30

how policies can increase quality of workforce

reduce income tax or direct funding of education