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32 Cards in this Set
- Front
- Back
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How much should a firm produce?
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Produce to maximize profit
Profit = Revenues - Costs |
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What determines revenue?
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Price x Quantity
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In the cost side of production, what are needed for production to take place?
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Inputs, such as Technology and Knowledge
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Imagine an actual coffee house.
What types of inputs are necessary for the production of a cup of coffee? |
Building, coffee machine, coffee beans, filters, cups, water, energy, workers (labor), tables and chairs
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an input that is used according to how much is produced
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variable input
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an input that is used in fixed amount regardless of the level of output
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fixed input
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In actual coffee house, which inputs would be considered "fixed inputs"? Which would be considered "variable inputs?
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Fixed = building and coffee machine
Variable = consumables or supplies |
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at least one of the inputs is fixed
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short run production
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capacity is adjusted to the optimal level of production by changing the use of all inputs
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long-run production
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What are three implicit costs?
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Depreciation, Wages Forfeited, and Interests Forfeited
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the sum of all costs, i.e., fixed costs plus variable costs
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total costs
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the additional production due to the use of an additional unit of an input, holding the amount of other inputs constant
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marginal product
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Two Reasons why Marginal Product is typically increasing and then decreasing as more workers are employed? Why?
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Increasing because of labor specialization
Eventually decreasing because there is not enough equipment and you have too many workers |
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TC / Q
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ATC
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FC / Q
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AFC
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VC / Q
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AVC
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Change in Total Cost / Change in Quantity
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MC
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FC _____ ___ ____ with greater Q
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stays the same
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MC eventually ________ with greater Q
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increases
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AFC _________ with greater Q
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decreases
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Because MC eventually increases, AVC eventually _________ with greater Q
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increases
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Because AFC is _________ and AVC is eventually _________, ATC first ________ but eventually ________
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decreasing; increasing; decreases; increases
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Why is the MC curve "U"-shaped? In other words, why is the MC first decreasing and then increasing?
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Decreasing first because productivity is initially increasing
Becomes increasing because productivity is decreasing Need to have more workers to increase production |
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Note that the MC curve intersects the ATC curve at its minimum. Why does this happen?
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If MC < ATC, then ATC is decreasing
If MC > ATC, then ATC is increasing |
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refers to the capacity of production and can be changed in the long-run, but not in the short-run b/c some inputs are fixed
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production scale
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refers to how much is actually produced at any given time, which is limited by the current production scale
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production level
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Why are short-run average costs (SRAC) different than long-run average costs (LRAC)?
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Short Run - Limited by that average cost
Long Run - Not limited, can move to anywhere |
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The situation when a firm's long-run average costs fall as it increases output
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economies of scale
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What causes economies of scale?
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"Technology", better management, labor specialization, and lower financial costs
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How are economies of scale related to mergers of companies in the same industry?
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Cover more area and more market power
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If greater scale of production reduces costs, why companies usually have many factories, offices, or stores rather than a very big one?
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Distribution cost becomes high if all production is done in one place
Scarcity of resources in the area Management Coordination (due to bureaucracy and too many people to manage) |
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the situation when a firm's long-run average costs rise as the firm increases output
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diseconomies of scale
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