Production
Costs
Profits
Analogies
Big Picture
100
The production model assumes the use of only these two inputs (factors of production)
What are labor (L) and capital (K)
100
This is the general equation of the Total Cost function
What is TC = wL + vK
100
This is the profit maximizing condition for a firm in a competitive market
What is MR = MC
100
An indifference curve is to utility as this is to production
What is an isoquant
100
The fact that consumers must give up one consumption good in order to consumer more of another and producers must use less of one input in order to use more of the other is an application of this "principle of economic decision-making".
What is "in achieving objectives, people make decisions that involve trade-offs".
200
This is the additional output produced by adding one more unit of labor, holding capital constant
What is marginal product of labor (MPL)
200
This is the cost minimizing condition, which is a mathematical representation of the tangency between the isoquant and the TC curve.
What is RTS = w/v
200
For a firm that faces a downward sloping demand curve, this is the relationship between price and marginal revenue
What is MR<P
200
the marginal rate of substitution is to utility as this is to production
What is the rate of technical substitution
200
One principle of economic decision making is that rational people will only achieve their objective by making decisions at the margin. If MPL/w < MPK/v, this is how a firm could alter their decision to better achieve the objective.
What is employ more capital and less labor.
300
This is the explanation for "diminishing marginal product"
As inputs increase, outputs increase at a diminishing rate. Each additionally unit of input is less productive than the one before, because the other input is being held constant.
300
If the RTS > w/v (Assuming L is on the x-axis and K is on the y-axis) then what substitution should be made between labor and capital to reduce costs?
If RTS > w/v then you can substitute away from capital (less) and towards labor (more) to reduce costs.
300
At points where demand is inelastic, this is the sign of MR. Why?
What is negative. Because as price falls (moving down a demand curve) quantity demanded will rise by a smaller percentage, which will result in larger revenue losses than gains.
300
A utility function is homogenous of degree one is like a production function exhibits….this
What is constant returns to scale
300
A firm in a competitive market must make two important choices. The first choice is made with profit maximization as the goal. The second choice is made with cost minimization as a goal. These are the two choices.
The first goal is to choose an output quantity that maximizes profit. The second choice is to choose a combination of inputs that will produce that given quantity at the lowest cost.
400
All points on an isoquant curve represent this
What are all combinations of labor and capital that produce the same (a particular) amount of output.
400
This is the marginal decision (the cost minimizing input choice) for a rational firm.
What is MPL/w = MPK/v "bang for your buck"
400
For a linear demand curve, this is the relationship with the MR curve regarding y-intercept and slope.
What is MR has the same y-intercept and twice the slope.
400
A utility maximizing person will choose a bundle of goods (X and Y) such that the utility gained per dollar from consumption of each good is the same. The analogous concept for cost minimizing firms is this:
A cost minimizing firm will choose a combination of inputs (L and K) such that each input gives the same "bang for the buck" , which ran MPL/w = MPk/v.
400
When the price in a market is above SAC, each firm is making positive economic profits. How will the market adjust to this situation in the long run?
WHen there are positive economic profits to be made, firms will freely enter the industry. This shift the supply curve to the right and prices will adjust downward, until economic profits are zero in the long run.
500
This is an explanation in words of "RTS is diminishing"
The rate at which a firm is able to give up one input and use more of the other input will be decreasing because as you give up more and more of an input, the remaining units become more valuable to your production.
500
For a firm with increasing returns to scale, 1. this is the relationship between output and total costs and 2. this is the relationship between MC and AC
As output rises, total costs will rise at a decreasing rate. As marginal costs decrease, average costs also decrease, but MC will always be below AC.
500
When profits are positive for a price-taking firm in the short run, this is the relationship between price and short-run average cost.
What is P > SAC
500
The utility maximizer's decision is constrained by the budget constraint. The cost minimizing firm's decision is constrained by this.
What is the fixed level of output.
500
In the long run, economic profits for firms remaining in an industry are zero. This is an explanation of why this is not a bad thing.
Economic profit = accounting profit - opportunity cost…thus zero economic profit means accounting profit = opportunity cost and accounting profit is positive.
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