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34 Cards in this Set
- Front
- Back
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PRODUCER CHOICE |
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Demand Curve |
Demand curve represents the relationship between the price of a good or service and the quantity demanded |
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Substitute Good |
A good is a substitute good if a higher price for this good leads to a larger quantity demanded for the good we are investigating at every price level |
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Complement Good |
A good is a complement good if a higher price for this good leads to a smaller quantity demanded for the good we are investigating at every price level |
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Labour-Leisure Trade-Off |
Decision to work - People face a tradeoff in the choice of consumption goods (leisure or goods purchases from labour income) - The set of choices is limited by the amount of time a person has available to them - 24hrs in a day - So the wage implicitly gives the opportunity cost ofleisure in dollar terms: an hour of leisure means anhour less work – you give up $w. |
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Intertemporal Consumption |
Decision to save: The inter-temporal (or lifetime) budget constraint (BC)represents the possible combinations of consumptionin the working period and in the retirement period. – If a person consumes all their income during the workingperiod there are no saved funds available for retirement. |
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Labour Supply |
The number of hours worked. |
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Labour Force Participation |
Some people's preferences mean that they choosenot to work at all – they choose only leisure and no trade goods(as they have no wages). - Introducing non-labour income into the work-leisure model let'sus explain being out of the labour force and still being able toconsume trade goods - Participation will be affected by the costs of taking a job, egtravel/ commuting costs, buying lunch every day or child care |
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The Consumption-Saving Choice |
- Another application of the constrained choice framework toindividual decision making problems is the savings decision. - Saving is a choice between two goods: goods today andgoods in the future. |
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Saving |
The savings decision is a choice between two goods:goods today and goods in the future.Three determinants of saving are: 1) income (from which people save) 2) the interest rate (which yields a return to saving) 3) how much people care about current consumptionrelative to future consumption (time preference). |
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The Saving Decision |
E.g. to borrow or to save? the person earns W1 in period 1; they can consume (C1) or save it (C2). They can also borrow against W2. - If C1 - If C1>W1 the person borrows R = interest rate, we use this to determine the value of money in time; we do this by adding 1 + interest rate (r) The lifetime BC is: (1+r)W1 + W2 = (1+r)C1 + C2 |
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What is Profit? How Do Firms Maximise This? |
We begin with the assumption that a firm aims to maximise profits 1) Revenues - the amount a firm earns. TR = P x Q 2) Costs - the cost of production. TC = VC + FC = AVC x Q + FC (note AVC = MC for a constant cost industry) 3) Profits - the difference between revenue & costs, Profit = TR - TC (losses are negative profits, where costs exceed revenues) "normal" profit: a normal rate or return equal the (risk adjusted) rate of return on capital in its best alternative use |
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Marginal Product |
The MP is the extra output from the use of one extra unit of an input, holding all other inputs fixed. - With one variable input, the MP is the slope of the production function D = Change. L = Labour |
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Diminishing Marginal Productivity (DMP) |
DMP implies that even with constant wages, additional units of output cost more than previous units. - as more labour is used, holding all other inputs constant, the marginal product of labour diminishes - additional workers are not as productive as prev workers, because of the increased load on fixed plants |
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Labour and Capital |
L & K are tools - they only have value when used together, therefore they are complementary inputs - higher labour increases the productivity of capital L = Variable Cost K = Fixed Cost Even though K is fixed, the output produced by a given K is greater. - Both inputs can be substituted for each other to some degree, but they also often have this complementary nature. |
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The Short Run & The Long Run |
Short Run = The period where labour (and the extraction of natural resources) can be varied, but capital is fixed Long Run = However by investing firms can change their stock of capital. As a result, in the long run (suff far in the future) firms can adjust all inputs - including capital. There is never a long run fixed cost (if asked in multi choice answer will be 0) |
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Economies of Scale |
Usually, long-run average cost (LRAC) curves typically slope initially, then get flat, and then slope up, and so look much like a saucer. - this is explained by the property of returns to scale ** note the function of Alpha (A) and Beta (B) (google) |
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Constant Returns to Scale |
If you double your inputs and it doubles your output then you have constant returns to scale - if the firm increases inputs proportionally, and output rises by the same proportion - increasing returns to scale - constant returns to scale - decreasing returns to scale Can show the returns to scale through a picture (graph) mathematical equation, or through words |
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Decreasing Returns to Scale |
If the firm increases inputs proportionally, and output rises by the same proportion then they exhibit constant returns to scale |
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Production with Two Variable Inputs |
Cost-minimisation (technically efficient production) involves an application of the equi-marginal principle.
- if r is the rental cost of capital and w is the wage, cost minimisation requires that; MPK/r = MPL/w That is, marginal product per dollar should be equalised across all (variable) inputs |
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Production Isoquant |
A production isoquant shows a set of (technically) efficient techniques that produce a given level of output
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The Slope of a Production Isoquant |
The slope of the isoquant is the marginal rate of technical substitution (MRTS). To keep output constant (along the isoquant) the loss of output from using less of one input must be matched by the added output produced by using more of the other output.
We substitute from one output to another |
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Iso-Expenditure Curve |
Combining an isoquant with an iso-expenditure (constant cost) curve, we can identify the least cost technology. the slope of an iso-expenditure line is: -PL/Pk
- Eg is the slope is -6/10 we must divide the vertical intercept by the horizontal to get -3/5 Note: Pl=3 and Pk=-5 - The production isoquant can be treated as a restraint |
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A Firm's Revenue |
A firms income or total revenue, TR =pQ
Marginal revenue: the extra revenues a firm earns from selling on extra unit MR = DeltaTR/DeltaQ (delta is a triangle) = slope of the total revenue curve |
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Competitive Markets |
In a competitive market, firms are "price-takers" - they face a horizontal demand curve.
- As the firm can always sell the next unit at the going market price, MR = price |
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Profit Maximisation in Competitive Markets |
Firms produce where the difference between total revenue and total cost is greatest
This occurs where the slope of TR and the slope of TC are equal - the slope of the TR curve is MR - the slope of the TC curve is MC That is, competitive firms maximise profits at a production level where MarginalRevenue = MarginalCost |
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Production in Competitive Markets |
for a perfectly competitive firm the MR = Price and P = MC |
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What determines cost? |
Costs depend on the inputs a firm uses. - The productivity of factors of production - The price of factors of production - What can be changed - fixed and variable costs (and how much of that input is used) An input (or factor of production) is a good or service used to produce output. Inputs include; .... |
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Future Value (FV) vs Present Value (PV) |
FV of X = (1 + 10%) $40K (amount you saved) PV of $40k =1/1 + r Y = X You just do the inverse of one and another based on Future Value and Present Value (whether you want to save or consume) |
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Production Functions |
A set recipe used to determine the set of available production plans ( a production plan is a list of inputs & a level of output) - A production function is the set of avail plans that give the max output given the inputs |
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Production Functions & Efficiency |
For a given level of output , the firms aims to choose a plan that minimises its costs ( and maximises profits) - The PF is a set of technically efficient production plans i.e it gives the max amount of putout that can be made given the specified inputs - therefore the firms aims to choose a technically efficient production plans ..... |
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Average Cost |
AC = Total Cost / Quantity |
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Increasing Returns to Scale |
if the firm increases inputs proportionally, and output rises more than proportionally they they exhibit increasing returns to scale |
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