The Theory If The Firm: Production And Costs Flashcards
(25 cards)
Definition
The concept that a firm exists and makes decisions solely to maximise profit
Production function
Specifies the maximum level of output that can be produced in terms of the amounts of output that can be produced in terms of the amounts of input being used
Short run
At least one factor of production is fixed and can’t be varied
Long run
All factors can be changed and theres more constraints in short run
Total cost formula
Total cost = Fixed cost + variable cost
TC = FC + VC
Law of diminishing return
States that the extra output will decrease as more units of variable factors are added to the fixed factor
Marginal cost formula
Marginal cost = change in total cost divided by change in quantity
Marginal cost labour formula
Marginal cost labour= change in total cost of labour divided by the change in labour employment
What happens if there are demonising returns to labour
The marginal cost of labour will rise
Average cost formula
Average cost= TC divided by quantity
What happens if marginal cost falls below average cost
If marginal cost falls below average cost then average cost decreases
What happens if marginal cost rises above average cost
If marginal cost rises above average cost the average cost increase
When will a firm prefer to produce nothing
When the market price is less then the average variable cost the firm will prefer to produce nothing
What are the types of return to scale
.constant, increasing and decreasing. This refers to how a firms output increases in real action to inputs
Types of return to scale - long run
Internal economies of scale- lower unit costs as a result of a larger size factory
Types of return to scale- Diseconomies of scale
If a firm expands too much then it may find the average cost rises in the long run
Types of return to scale- Minimum efficient scale
When the unit cost is at its lowest possible point when the company is producing its goods effectively
Total revenue
When a firm measures its value of its sales
Total revenue formula
Total revenue = price • Quantity
TR = P • Q
Marginal revenue
Marginal revenue is the difference in the total revenue when an additional unit is sold
Marginal revenue formula
Marginal revenue = change in total revenue divided by the change in the number of units sold (quantity)
Average revenue formula
Average revenue = total revenue divided by output
What does accounting costs measure
Measures the cost of items used to produce and sell the products. These are explicit costs which could include labour materials, land, equipment, etc…
Formula for accounting profit
Accounting profit = Total revenue - accounting cost
AP = TR - AC
