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a process by which resources are transformed into products and services that are usable by consumers

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production

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a factor that can be used to produce a product that can satisfy a human want or desire

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resource

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humans who are responsible for decision making, includes entrepreneurial functions of risk bearing, organizing resources, and resource decision choice

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management

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the physical or tangible resources used to aid or enhance production

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capital

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all the physical characteristics of trust input to yield a product including the soil and the natural environment it is contained within

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land

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the physical act or effort of performing a task by humans

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labor

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the particular set or combination of resources (inputs) used to produce a given level of product (output)

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production function

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when the output doubles when all inputs are doubled

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constant returns

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output increases at a faster rate than the rate of increase in the input

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convex area on the TPP graph

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output increases at a slower rate than the rate of an increase in input

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concave area on the TPP graph

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as successive amounts of variable input are combined with a fixed input in a production process, the TPP will increase, reach a maximum and decline

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law of diminishing returns

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an amount added to total physical product when another unit of the variable input is added

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Marginal physical product

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∆Y/∆X or ∆TPP/∆X1

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Marginal physical product equation

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how productive the variable input is on average

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Average physical product

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Y/x1

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Average physical product equation

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MPP is maximized

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where TPP curve switched from convex shape to concave shape is where...

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MPP=APP

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the rational state of production stage II begins where...

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MPP=APP

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APP is maximized where

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MPP=0

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the end of stage II of production and the beginning of stage III is where

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MPP=0

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TPP is maximized where...

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APP is still increasing throughout the stage

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stage one is irrational because

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MPP < 0 and you generate less output from adding additional amounts of input

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stage III is considered irrational because

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the monetary worth of output produced by the different amounts of the input used

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Total Value Product

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TVP = TPP × Py (where py is the price of the output)

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TVP equation

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Average value of output per unit of input at each level of use of that input

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Average Value Product

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AVP= TVP/X1 = APP × Py

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AVP equation

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the additional value of output produced by each additional amount of the input

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Marginal value product

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MVP = ∆TVP/∆X1 = MPP × Py

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MVP equation

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the amount added to total cost when one more unit of the variable input is used

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Marginal Factor Cost

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MFCx1 = Px1 (where Px1 is the price per unit of the variable input)

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MFC equation

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where one more unit of the variable input adds to the revenue just what it costs, MVP = MFC

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the optimum level of production is reached

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total revenue - total cost

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net revenue

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TVP

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total revenue

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MFC × quantity of input x

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total cost

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the MVP is closest to the MFC without being less than the MFC

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when calculating optimal level of inputs from a table of fixed input levels, the optimal input level occurs where...

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find the new production point where MVP=MFC=Px1a

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if the price of the input increases to PX1a then we simply

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changing one variable input while holding all other inputs constant affected the level of output produced and net revenue generated

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factor production relationship

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graphical representation of the 2 variable input production function

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as the TPP curve was the graphical representation of the one variable input production function the isoquant is the

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a curve that shows all combinations of the two variable inputs that can be used to produce a given quantity of output

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isoquant

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the technical relationship that occurs when one input can be substituted for another in production while yielding the same level of output

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resource substitution

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a form of resource substitution where one input can be exactly substituted for another in production

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perfect substitute

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a form of resource substitution where two inputs can only be used in production in a fixed ratio and cannot be a substitute for one another

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perfect compliments

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a form of resource substitution where larger and larger amounts of a second variable resource are required to replace equal incremental reductions of the 1st resource while maintaining the same level of output

answer

imperfect substitutes

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the number of units of X2 that X1 can replace without changing the output

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marginal rate of substitution

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MRSx1x2 = ∆X2/∆X1

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MRS equation

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we reduce the level of output by the MPP of the reduced input multiplied by the magnitude change of that reduced input

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when we reduce the use of one input without increasing the other input in production

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∆Y = MPPx2 × ∆x2

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change in output equation

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MRSx1x2 = ∆x2/∆x1 = MPPx1/MPPx2

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MRS along an isoquant equation

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all the combinations of the 2 given inputs that can be afforded to produce a given level of output

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isocost curve identifies

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price of x1, price of x2, total amount of money to be spent on inputs

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3 pieces of information that are needed to make an isocost line

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calculated by the total amount of money to be spent on inputs divided by the price of the input X2 and the toady amount of money to be spent on inputs divided by Px1

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the points where the isocost line interest the vertical and horizontal axis are

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MRSx1x2 = ∆X2/∆X1 = Px1/Px2

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to minimize the cost of producing a given level of output we equate the MRS to the price ratio

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MPPx1/Px1 = MPPx2/Px2

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least cost combo

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shows all possible combos of two producers that can be produced given the set of resources in the times control

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production possibilities curve frontier

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∆Y2/∆Y1 = MRPSy1y2

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measure the differing rates at which either product will replace the other along the production possibility curve

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shows all possible combos of 2 products sold that will bring the same total revenue

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isorevenue line

question

is to produce where the marginal rate of production substitution is equal to the ratio of the output proves optimal combination where the slope of production possibilities equals the slope of isorevenue

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the optimal combo of the 2 products for produce

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∆Y2/∆Y1 = Py1/Py2

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optimal combination of 2 products

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shows the revenue and profit maximizing proportions of Y1 as the firm expands or contracts

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expansion path

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costs that have been incurred when money is spent to hire labor, repeat machinery, buy seed, full, or other things for which cash expenditures are made

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explicit costs

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a cost that has been incurred in using any resource for which there is not direct cash outlay during the period the resource was being used

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implicit costs

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the cost borne by the producer when a resource that is currently being used for one activity is used in its next most valuable activity. Another type of implicit, true cost of production.

answer

opportunity cost

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revenues minus expenses

answer

bookkeeping profit

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revenues minus explicit and implicit costs, the amount by which net earnings exceed payment required to attract it to (or keep it in) its present use

answer

economics profit

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costs that increase or decreases output change

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variable costs

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Costs incurred for resources that do not change as output is changed

answer

fixed cost

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A planning concept that defines the level of flexibility in how resources (inputs) can be changed in the production process

answer

length of run

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span of time so short that no resource changes can be made in the production process. all variables are fixed

answer

immediate short run

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A span of time long enough that all resources (inputs) are considered variable. No inputs can be considered fixed in the ultimate long run.

answer

ultimate long run

question

total spending for the variable input

answer

total variable costs

question

the total costs of all the inputs that do not change as output changes

answer

totally fixed costs

question

sum of total variable costs and total fixed costs

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total cost

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synonym of TVP, calculated as price per unit of output multiplied by total output level

answer

total revenue

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total revenue - TC

answer

pure profits

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amount spent on the variable input per unit of output

answer

average variable cost

question

AVC = TVC/Y

answer

AVC equation

question

the cost of fixed resources per unit of output

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Average fixed cost

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AFC = TFC/Y

answer

AFC equation

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total costs of all the resources used per unit of output produced

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average total costs

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ATC = TC/Y

answer

ATC equation

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change in total cost when output is changed by one unit

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marginal cost

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∆TC/∆Y

answer

MC equation

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amount added to total revenue when an additional unit of output is produced and sold

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marginal revenue

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MR = ∆TR/∆Y = Py

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MR equation

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1% input increase → > 1% output increase

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Convex region of the TPP curve

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1% input increase → < 1% output increase

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concave region of the TPP curve

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increase in input means fewer output

answer

negative returns

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where the MPP is maximized and MC is minimized

answer

inflection point of the TPP curve

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the marginal costs of producing an additional unit of output in this areas increases

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in the concave portion of the production function

question

MPP = 0 and the MC curve is vertical

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when the TPP is maximized

question

APP is maximized

answer

AVC is minimized at the same point on the production function where

question

more input is added, minimum is reached where TPP is maximized

answer

AFC continues to decline as

question

some point past the point where AVC is minimized

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ATC is minimized at...

question

the optimum output level is found where marginal revenue is equal to marginal cost or MR=MC

answer

profit maximizing output

question

evaluation total cost and total revenue

answer

you can see how profit is maximized by

question

TPP curve is convex

answer

at low levels of input

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TPP curve is concave

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at high levels of input

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TC curve is concave

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at low levels of output

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TC curve is convex

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at high levels of output

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the firm will alter production as the output price changes to maximize profits

answer

short run supply curve of firm

question

MR = MC

answer

while the profit maximizing point is

question

the relationships between the level of the output price, the ATC, and the AVC

answer

profit maximixing point is based on

question

then the firm is generating economic profit

answer

if the output price is greater than the minimum cost point on the ATC curve at the point where MR = MC

question

occurs where the revenue made from selling the product exceeds both the explicit costs of the variable inputs used to produce the product and the implicit costs of the fixed inputs used to produce the product

answer

economic profit

question

then the firm is incurring an economic loss

answer

if the output price Py is less than the minimum cost point on the ATC curve but greater than minimum point on the AVC curve at the point where MR = MC

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at this price of the output the firm can pay the variable costs of production but cannot completely cover the fixed costs of production. It will continue to produce until the value of the fixed input depreciates.

answer

economic loss

question

then the firm cannot pay for the variable costs of production

answer

if the output price Py is less than minimum point on the AVC curve but where MR=MC

question

at this price of the output the firm is better off shutting down and simply incurring the costs associated with the sunk fixed costs rather than continuing to lose more money as more of the output is produced

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when the firm cannot pay for the variable costs of production

question

the point where output price is equal to the AVC

answer

shutdown point

question

is simply the difference between the cost per unit of the output where MR = MC and the cost per unit of the output = ATC

answer

shaded area on a graph

question

1. the price of the output declines as more output floods the market from additional producers and drives down the price 2. the price of the variable and fixed inputs increase as more producers bid up the price of inputs

answer

as more producers enter the market two impacts occur

question

shifts the MR curve downward

answer

the effect of the downward pressure on the output price

question

results in an upward shift of the AVC AFC ATC and MC curves

answer

the effect of the upward pressure on the input prices

question

the amount of a good or service producers are willing to offer for sure at different prices, graphically occurs where the marginal cost curve equals different prices of the output Py, the individual firms supply curve starts at the minimum of the AVC curve

answer

supply curve

question

the horizontal summation of all individual firms supply cares for a product or commodity, graphically it is the horizontal summation of all individuals firms marginal costs curves above their minimum AVC

answer

Market supply curve

question

change in quantity supplied, and change in supply

answer

2 types of changes in market supply

question

show the changing level of the product or commodity supplied given changes in the price of the product or commodity

answer

movement along a supply curve

question

change in supply

answer

shift in the entire supply curve

question

a measure of the percentage change in quantity supplied in response to a percent change in price

answer

price elasticity of supply

question

Es = (Q1-Q2)/(Q1+Q2) / (P1-P2)/(P1+P2)

answer

price elasticity of supply equation

question

for a 1% increase in the price of the product there is less than 1% increase in quantity supplied

answer

if the supply is price inelastic

question

for a 1% increase in the price of the product there is greater than 1% increase in quantity supplied

answer

if the supply is price elastic

question

for a 1% increase there is an equal 1% increase in quantity

answer

if the supply is unitary elastic

question

the point where they intersect determines the equilibrium quantity of the product sold in the market place and the equilibrium price of the quantity sold

answer

the market supply curve derived from the individual supply curve and plot them on a graph

question

the quantity demanded by censures equals the quantity supplied by producers, no shortages or surpluses occur at this point

answer

market equilibrium

question

occurs when prices are not allowed to change to market forces of supply and demand, results in market shortages or surpluses

answer

market disequilibrium

Agricultural Economics Exam 2 – Flashcards

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