Microeconomics (Lecture 5 & 6)

Created by

ria🫶🏽

Cards (15)

What is Hicks income effect
if your money income stays the same, but prices increase, your real income falls. Real income refers to how much you can buy; your purchasing power.
The income effect of a price change is due to changes in real income.
What is production
the conversion of scarce resources (FOP) into goods and services
What is production function analysis
the relationship between the quantities of inputs used and the maximum quantity output that can be produced, given current knowledge of technology and organisation
what is law of diminishing returns
when increasing amounts of variable factors are used with a given amount of fixed factors. Therefore each extra unit of the variable factor will produce less output than the previous unit
formula for APP (average physical product)
= total physically product (TPP) / QV (quantity variable)
formula for marginal physical product (MPP)  
= change in total physical product (TPP) / change in quantity variable (QV)
What are economies of scale
increasing output leads to lower long run average costs
examples of EOS
eg:
specialisation and division of labour
greater efficiencies of larger machines
multi stage production
financial economies
managerial economies
What are diseconomies of scale
when long run average costs start to rise with increased output
what is an isoquant
shows all combination of factors that produce a certain output
what is an isocost
show all combinations of factors that cost the same amount
Example of Isoquant
eg:
20 capital and 18 labour = capital intensive
14 capital and 24 labour = labour intensive
formula for marginal rate of substitution
= change in capital / change in labour
What is diminishing marginal rate of substitution
increasing amounts of labour reduces the amount of capital needed, at a decreasing rate
how to maximise profits through isoquants and isocosts 
a firm will need to produce at the point of the highest possible isoquant and minimum possible isocost