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ECO2101 Microeconomics > ECO2101 Production and Costs (2) > Flashcards

ECO2101 Production and Costs (2) Flashcards

(64 cards)

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1
Q

What do we assume about a firms objective?

A

Objective is to maximise profits

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2
Q

What is the equation for profit?

A

Profit (π) =Total Revenue (TR) - Total Costs (TC)

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3
Q

What is the difference between accounting profit and economic profit?

A

TC in economic profit includes opportunity cost

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4
Q

What is the simplified equation for profit with opportunity costs?

A

π=π^a+OC
where:
π= economic profit
π^a= accounting profit
OC = opportunity cost

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5
Q

What is normal (economic) profit?

A

Where accounting profit just covers OC
π^a=OC

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6
Q

What is super-normal (economic) profit?

A

When accounting profit exceeds opportunity cost
π^a>OC

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7
Q

Where is the optimal profit maximising point for a firm?

A

Where MR = MC
or when an additional unit of q changes TR and TC by the same amount

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8
Q

What should a firm do in these situations:
MR>MC
MR<MC
MR=MC

A

MR>MC - increase q
MR<MC - decrease q
MR=MC - optimal q (q*)

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9
Q

What is the notation for profit maximising quantity of q ?

A

q*

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10
Q

What are two key factors that determine costs of production?

A

Cost of productive inputs
Productive efficiency of firm

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11
Q

What is the production function for a firm?

A

q=f(K,L)
K = capital
L= labour

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12
Q

What is the notation for cost per unit of capital and cost per unit of labour?

A

Per unit capital - r
Per unit labour = w

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13
Q

What is the long run?

A

Period of time over which a firm can change all factor inputs

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14
Q

What is the short run?

A

Period over time over which at least one of its factor inputs is fixed

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15
Q

How do we describe productive efficiency in the short run and long run?

A

Long run - returns to scale
Short run - returns to a factor

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16
Q

What does returns to scale describe?

A

The effect on q when all inputs are changed proportionately
e.g. K (capital) and L (labour)

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17
Q

What do increasing, decreasing and constant returns to scale mean?

A

Increasing returns to scale - Increase in all inputs leads to a more than Equi-propriate increase in q
Decreasing returns to scale - increase in all inputs leads to a less than Equi-proportionate increase in q
Constant returns to scale - Increase in all inputs leads to same equi-proportionate increase in q

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18
Q

What causes changes in returns to scale?

A

Economies of scale: specialisation, indivisibilities (cant scale down)
Diseconomies of scale - managerial problems from size

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19
Q

How do returns to scale relate to a firms long run costs?

A

Efficiency changes of firms transforming inputs to outputs in the long run will affect the cost of producing output.

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20
Q

Draw a graph showing decreasing returns to scale

A

check ppt (26)
LTC - long run total costs

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21
Q

How do we find LMC (long run marginal costs) from LTC (long run total costs)?

A

Slope of line drawn tangent to LMC at a particular point of q gives LMC of producing that level of q
LMC = change LTC/change(q)

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22
Q

What does IRS (increasing returns to scale) imply labour LMC?

A

Increasing IRS implies decreasing LMC

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23
Q

How do we find LAC (long term average costs)?

A

LAC=LTC/q
the slope of the line from the origin to point on LTC curve at particular level q gives LAC of producing said level of q

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24
Q

What does IRS imply about LAC?

A

IRS implies decreasing LAC

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25
What do we assume about a firms relationship with IRS and DRS?
We assume firms firstly enjoy increasing returns to scale (IRS) and then decreasing returns to scale (DRS)
26
What is the implied "efficient" size of a firm?
When it has exhausted all its IRS
27
How do we notate a firms efficient point of production?
q^mes - minimum efficient scale
28
Draw a LTC curve showing the minimum efficient scale point
check ppt (26)
29
What is the relationship between LMC and LAC given: qq^mes q=q^mes
qq^mes - LMC>LAC q=q^mes - LMC=LAC
30
For what relative levels of LMC is LAC: falling, flat , rising?
LAC is falling if LMCLAC
31
How is the short run production function different?
One factor is fixed which is denoted by (bar) (usually assumed to be capital) q=f(K(bar),L)
32
What does increasing, decreasing and constant returns to a factor mean?
Increasing returns to a factor - increase in factor leads to more than proportionate increase in q Decreasing returns to a factor - increase in factor leads to a less than proportionate increase in q Constant returns to a factor - Increase in factor leads to same proportionate increase in q
33
Draw a graph showing IRF CRF and DRF (.... returns to a factor)
check ppt (27)
34
What are fixed vs variable costs?
Fixed costs - do not vary with q (rent) Variable costs - vary with q (energy , wages)
35
What are the equations for STC and SAC?
STC=SFC=STVC divide by q to get: SAC=SAFC+SAVC
36
What does the Law of diminishing returns suggest about returns to scale?
It is always the case that decreasing returns to a factor will set in
37
Draw a graph showing SFC, STC and STVC
check ppt (27)
38
Draw a graph showing SMC, SAC, SAVC and SAFC
check ppt (28)
39
What is the difference between Long and Short run costs?
Short run costs are derived for a particular level of the fixed input
40
What is the equation for a firms cost?
c=wL+rK
41
How do we notate the points that maximise q and minimise c ?
Max q = c0 Min c = q0
42
What are different production techniques?
Different ways of producing same number of units (q) e.g. Technique A: 2 units K 1 unit L to produce 1 unit q Technique B: 1 unit K 2 unit L to produce 1 unit q
43
What do we assume about different production techniques?
The exhibit CRS (constant returns to scale)
44
Draw a graph showing different production techniques A and B
check ppt (28)
45
What is technique AB?
Where the firm combines techniques A and B. example: instead of 1K and 2L for A and 2K and 1L for B the firm now uses 1.5K and 1.5L to produce 1 unit of q
46
Draw a graph showing production techniques A,B and AB
check ppt (29)
47
How does combining production techniques benefit firms?
They can choose the combination of inputs and take advantage of cheaper inputs
48
What is an Isoquant?
A line depicting combinations of K and L that yield the same level of q
49
Draw a graph showing how the Isoquant map is formed
check ppt (29)
50
Draw a graph which shows a technically inefficient new production technique (C)
check ppt (30)
51
Draw a graph which shows a technically efficient new production technique (D)
check ppt (30)
52
Draw an isoquant map after all different techniques have been included
check ppt (31)
53
How can we measure a firms returns to scale using isoquants?
We can measure firms returns to scale in terms of isoquants moving along a ray from the origin CRS if q2=2q1 and q3=3q1 IRS if q2>2q1 DRS if q2<2q1
54
Draw a graph showing a firm with constant returns to scale
check ppt (31)
55
How do we measure a firms returns to a factor (short run)?
Move along a horizontal line from the particular level of K being held fixed.
56
What always happens to a firms returns to a factor?
Firms always incur decreasing returns to a factor, irrespective of its returns to scale
57
Construct a graph showing a firms returns to a factor while the firm has CRS
check ppt (32)
58
What is an Isocost curve?
A line depicting equal cost expanded on inputs
59
What is the equation for a firms costs?
c=rK+wL
60
Where will a firms optimal choice of isocost curve be?
Tangent to an isoquant curve
61
Draw an isocost curve that shows a firms optimal input decision
check ppt (32)
62
is SR or LR cost higher for producing q ?
SR cost is higher than LR cost except for one particular level of q
63
Draw a graph with both LRTC and SRTC
check ppt (33)
64
Draw a graph showing LAC with LMC and also SAS with SMC
check ppt (33)

ECO2101 Microeconomics (6 decks)

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