Lecture 1 Econ 2020 (Chapter 6): Firms, Production, and Market Structure – Key Terms (English)

Vocabulary flashcards covering key concepts from the notes on firms, production, and market structure ( Chapters 6, Lecture 1).

Production Function

The relationship between inputs used (e.g., z1, z2) and the maximum output (q) that can be produced with current technology; written as q = f(z1, z2).

Feasible Production Set

All feasible production plans (q, z1, z2) given a firm's technology; a plan is feasible if there exists a technology to produce q with z1 and z2.

Technically Efficient

A feasible production plan that is both output-maximizing for given inputs and inputs-minimizing for a given output.

Leontief Production Function (Fixed Proportions)

q = min{z1, z2}; inputs must be used in fixed proportions with no substitution between inputs.

Cobb-Douglas Production Function

A two-input production function of the form q = A z1^α z2^β (often α+β=1); example in the notes: q = sqrt(1200 z1 z2) when α=β=1/2.

Capital (K)

Long-lived inputs such as land, buildings, and equipment used in production (capital services).

Labor (L)

Human inputs used in production, i.e., hours worked by workers and managers (labor services).

Materials (M)

Natural resources and raw or processed goods consumed in production (materials).

Fixed-Proportions Shoe Example

A Leontief-like case: 1 right shoe + 1 left shoe produce 1 pair; q = min{z1, z2}.

Cranapple Drink (Fixed Proportions)

Fixed-proportions example: q = min{z1/150, z2/100} where z1 is apple juice and z2 is cranberry juice.

ABC Courier Service (Variable Proportions)

Example where q ≤ z1 s and q ≤ (1200/s) z2; maximizing q over speed s yields f(z1, z2) = sqrt(1200 z1 z2).

Technology

The production method or parameters (e.g., speed s) that determine how inputs are transformed into outputs.

Transaction Costs

Costs incurred by market participants in making a trade (selling endowment, tuition/learning, transportation) that can motivate firm formation.

Ronald Coase

Economist who introduced transaction costs to economics; Nobel Prize in 1991.

Existence of Firms (Why Firms)

Firms exist because transaction costs (selling, learning, transporting) can make in-house production more efficient than market purchases.

Firm Size Criterion (MC = p + TC)

The idea that the marginal cost of producing another unit equals the price plus transaction costs; determines optimal firm size.

Sole Proprietorship

A private for-profit firm owned by a single individual who bears personal liability for debts.

General Partnership

A private firm owned by two or more partners who are personally liable for debts; partnership can end if a partner leaves.

Corporation

A separate legal entity owned by shareholders; board of directors and managers run the firm; owners have limited liability.

Limited Liability

Shareholders’ personal assets are protected; the most they can lose is their investment in the stock.

Private For-Profit Firm

Firms owned by private individuals or entities whose objective is to earn profits.

Public Firm

Firms owned by the government or government agencies (e.g., Amtrak).

Nonprofit Firm

Organizations not driven by profit; pursue social, public-interest objectives.

Definition of a Firm

An organization that converts inputs (labor, capital, materials) into outputs sold in the market.

Production Plan

A triple (q, z1, z2) indicating output and inputs; feasible if there exists a technology to achieve q with z1 and z2.

Output Maximization vs. Input Minimization

Maximizing output for fixed inputs versus minimizing inputs for fixed output; both relate to efficiency.

Equilibrium Prices (Market)

Prices p that satisfy D(p) = S(p); existence of such p allows a market-clearing allocation.