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Flashcards in Chapter 5 Deck (43)
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1
Q

Production function

A

Defines the maximum amount of output that can be produced with a given set of inputs. Q = F(K,L)

K = Units of capital
L = Units of labor
2
Q

Fixed factors of production

A

The inputs a manager cannot adjust in the short run

3
Q

Variable factors of production

A

The inputs a manager can adjust to alter production

4
Q

Short run production function

A

Q = f(L) = F(K*, L)

5
Q

Total product (TP)

A

The maximum level of output that can be produced with a given amount of inputs

6
Q

Average Product (AP)

A

A measure of the output produced per unit of input. APL = Q / L

7
Q

Marginal product (MP)

A

The change in total output attributable to the last unit of an input.

8
Q

Increasing marginal returns

A

Range of input usage over which marginal product increases

9
Q

Decreasing marginal returns

A

Range of input usage over which marginal product declines

10
Q

Negative marginal returns

A

Range of input usage over which marginal product is negative

11
Q

Average Product of Capital

A

APK = Q / K

12
Q

Marginal product of capital

A

MPK = Chg Q / Chg K

13
Q

Marginal product of labor

A

MPL = Chg Q / Chg L

14
Q

The manager’s role in the production process

A

Ensure that the firm operates on the production function and to ensure that the firm uses the correct level of inputs

15
Q

Value marginal product

A

The value of the output produced by the last unit of an input.

16
Q

Value marginal product of labor

A

VMPL = P x MPL

17
Q

Law of diminishing marginal returns

A

States that the marginal product of an additional unit of an input will at some point be lower than the marginal product of the previous unit.

18
Q

Linear production function

A

A production function that assumes a perfect linear relationship between all inputs and total output.

19
Q

Leontief production function

A

A production function that assumes that inputs are used in fixed proportions.

20
Q

Isoquants

A

Defines the combinations of inputs that yield the same level of output

21
Q

Marginal rate of technical substitution

A

The rate at which a producer can substitute between two inputs and maintain the same level of output

22
Q

Law of diminishing marginal rate of technical substitution

A

A property of a production function stating that as less of one input is used, increasing amounts of another input must be employed to produce the same level of output

23
Q

Isocost line

A

A line that represents the combinations of inputs that will cost the producer the same amount of money

24
Q

Changes in isocosts

A

For given input prices, isocosts farther from the origin are associated with higher costs. Changes in input prices change the slopes of isocost lines.

25
Q

Cost minimization

A

Producing output at the lower possible cost

26
Q

Total cost

A

Sum of fixed and variable costs

27
Q

Fixed costs

A

Costs that do not change with changes in output; include the costs of fixed inputs used in production.

28
Q

Variable costs

A

costs that change with changes in output; include the costs of inputs that vary with output.

29
Q

Short-run cost function

A

A function that defines the minimum possible cost of producing each output level when variable factors are employed in the cost-minimizing fashion.

30
Q

Average fixed cost (AFC)

A

Fixed costs divided by the number of units of output

31
Q

Average variable cost (AVC)

A

Variable costs divided by the number of units of output

32
Q

Average total cost (ATC)

A

Total cost divided by the number of units of output

33
Q

Marginal (incremental) cost (MC)

A

The change in total costs arising from a change in the managerial control variable Q.

34
Q

Irrelevance of Sunk Costs

A

A decision maker should ignore sunk costs to maximize profits or minimize losses.

35
Q

Sunk cost

A

A cost that is forever lost after it has been paid out.

36
Q

Cubic cost function

A

Costs are a cubic function of output; Provides a reasonable approximation to virtually any cost function.

37
Q

Long-run average cost curve

A

A curve that defines the minimum average cost of producing alternative levels of output, allowing for optimal selection of both fixed and variable factors of production.

38
Q

Economies of scale

A

Exist whenever long-run average costs decline as output increases.

39
Q

Diseconomies of scale

A

Exist whenever long-run average costs increase as output increases.

40
Q

Constant returns to scale

A

Exist when long-run average costs remain constant as output is increased

41
Q

Multiproduct cost function

A

A function that defines the cost of producing given levels of two or more types of outputs assuming all inputs are used effectively.

42
Q

Economies of scope

A

Exist when the total cost of producing two products within the same firm is lower than when the products are produced by separate firms.

43
Q

Cost complementarities

A

Exist when the marginal cost of producing one output is reduced when the output of another product is increased.