Chapter 5: THE PRODUCTION FUNCTION Flashcards
An input into the production process that is a factor of production in making goods and services (buildings, machines, factories)
capital
A person who creates a business, whose idea it is to combine the inputs to produce the outputs
entrepreneur
An organization that combines inputs of labor, capital, land, and raw or finished component materials to produce outputs.
firm
Inputs that are not (as) affected by the number of units that you want to produce (e.g., you do not have to get an additional loom to produce more cloth)
fixed inputs
Physical and mental human effort; an input into the production process
labor
The process of combining inputs to produce outputs, ideally of a value greater than the value of the inputs
production
Mathematical equation that tells how much output a firm can produce with given amounts of the inputs
production function (PF)
Inputs that must change depending on how many units you want to produce (e.g., to produce more cloth you will need more labor and more wool); factors of production that a firm can easily increase or decrease in a short period of time
variable inputs
General rule that as a firm employs more labor, eventually the amount of additional output produced declines; additional laborers will add less additional output than the unit before
diminishing marginal productivity
basic material inputs (e.g., land, water, cotton, wheat)
raw materials / natural resources
What we give up in order to pursue an activity
costs
Out-of-pocket costs for a firm, for example, payments for wages and salaries, rent, or materials
explicit costs
Opportunity cost of resources already owned by the firm and used in business, for example, expanding a factory onto land already owned; costs not paid out that represent foregone earnings (e.g., using a building for business vs. renting it out for money)
implicit costs
The difference between the money that a firm brings in (total revenue) and the money it has to pay out (total costs); total revenue - total costs
profits
The sum of explicit and implicit costs; explicit costs + implicit costs
total costs
The number of units sold multiplied by the price per unit; number of units sold x price per unit
total revenue
Profit divided by the quantity of output produced; also known as profit margin; FC/Q
average profit
Total cost divided by the quantity of output; (ATC) = TC/Q
average total cost
Variable cost divided by the quantity of output; (AVC) = VC/Q
average variable cost
Occur when doubling inputs results in exactly double output; as more quantity (Q) is produced, the long run average cost curve stays flat; expanding all inputs proportionately does not change the average cost of production
constant returns to scale
A mathematical expression or equation that shows the cost of producing different levels of output
cost function
The long-run average cost of producing output increases as total output increases; occur when doubling inputs results in less than double outputs; as more quantity (Q) is produced, the long run average cost increases; also known as decreasing returns to scale
diseconomies of scale
The long-run average cost of producing output decreases as total output increases; occur when doubling inputs results in more than double outputs; as more quantity (Q) is produced, the long run average cost curve decreases; also known as increasing returns to scale
economies of scale
What the firm pays for the use of the factors of production
factor payments
Fixed inputs
fixed costs
Period of time during which all of a firm’s inputs are variable
long run
Shows the lowest possible average cost of production, allowing all the inputs to production to vary so that the firm is choosing its production technology
long-run average cost (LRAC) curve
The additional cost of producing one more unit; mathematically, 𝑀𝐶=𝛥𝑇𝐶/𝛥𝐿
marginal cost
Change in a firm’s output when it employees more labor; mathematically, 𝑀𝑃=𝛥𝑇𝑃/𝛥𝐿
marginal product
Average profit
profit margin
Period of time during which at least one or more of the firm’s inputs is fixed
short run
The average total cost curve in the short term; shows the total of the average fixed costs and the average variable costs
short-run average cost (SRAC) curve
Variable inputs; VC
variable costs
