Chapter 5: THE PRODUCTION FUNCTION

Question 1

An input into the production process that is a factor of production in making goods and services (buildings, machines, factories)

Answer 1

capital

Question 2

A person who creates a business, whose idea it is to combine the inputs to produce the outputs

Answer 2

entrepreneur

Question 3

An organization that combines inputs of labor, capital, land, and raw or finished component materials to produce outputs.

Answer 3

firm

Question 4

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)

Answer 4

fixed inputs

Question 5

Physical and mental human effort; an input into the production process

Answer 5

labor

Question 6

The process of combining inputs to produce outputs, ideally of a value greater than the value of the inputs

Answer 6

production

Question 7

Mathematical equation that tells how much output a firm can produce with given amounts of the inputs

Answer 7

production function (PF)

Question 8

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

Answer 8

variable inputs

Question 9

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

Answer 9

diminishing marginal productivity

Question 10

basic material inputs (e.g., land, water, cotton, wheat)

Answer 10

raw materials / natural resources

Question 11

What we give up in order to pursue an activity

Answer 11

costs

Question 12

Out-of-pocket costs for a firm, for example, payments for wages and salaries, rent, or materials

Answer 12

explicit costs

Question 13

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)

Answer 13

implicit costs

Question 14

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

Answer 14

profits

Question 15

The sum of explicit and implicit costs; explicit costs + implicit costs

Answer 15

total costs

Question 16

The number of units sold multiplied by the price per unit; number of units sold x price per unit

Answer 16

total revenue

Question 17

Profit divided by the quantity of output produced; also known as profit margin; FC/Q

Answer 17

average profit

Question 18

Total cost divided by the quantity of output; (ATC) = TC/Q

Answer 18

average total cost

Question 19

Variable cost divided by the quantity of output; (AVC) = VC/Q

Answer 19

average variable cost

Question 20

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

Answer 20

constant returns to scale

Question 21

A mathematical expression or equation that shows the cost of producing different levels of output

Answer 21

cost function

Question 22

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

Answer 22

diseconomies of scale

Question 23

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

Answer 23

economies of scale

Question 24

What the firm pays for the use of the factors of production

Answer 24

factor payments

Question 25

Fixed inputs

Answer 25

fixed costs

Question 26

Period of time during which all of a firm’s inputs are variable

Answer 26

long run

Question 27

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

Answer 27

long-run average cost (LRAC) curve

Question 28

The additional cost of producing one more unit; mathematically, 𝑀𝐶=𝛥𝑇𝐶/𝛥𝐿

Answer 28

marginal cost

Question 29

Change in a firm’s output when it employees more labor; mathematically, 𝑀𝑃=𝛥𝑇𝑃/𝛥𝐿

Answer 29

marginal product

Question 30

Average profit

Answer 30

profit margin

Question 31

Period of time during which at least one or more of the firm’s inputs is fixed

Answer 31

short run

Question 32

The average total cost curve in the short term; shows the total of the average fixed costs and the average variable costs

Answer 32

short-run average cost (SRAC) curve

Question 33

Variable inputs; VC

Answer 33

variable costs