Chapter 7 - The Production Process: The Behavior of Profit-Maximizing Firms Flashcards
production
The process by which inputs are combined, transformed, and turned into outputs.
firm
An organization that comes into being when a person or a group of people decides to produce a good or service to meet a perceived demand.
profit (economic profit)
The difference between total revenue and total cost.
total revenue
The amount received from the sale of the product (q * P).
total cost (total economic cost)
The total of (1) out-of- pocket costs and (2) opportunity cost of all factors of production.
normal rate of return
A rate of return on capital that is just sufficient to keep owners and investors satisfied. For relatively risk-free firms, it should be nearly the same as the interest rate on risk-free government bonds.
short run
The period of time for which two conditions hold: The firm is operating under a fixed scale (fixed factor) of production, and firms can neither enter nor exit an industry.
long run
That period of time for which there are no fixed
factors of production: Firms can increase or decrease the scale of operation, and new firms can enter and existing firms can exit the industry.
optimal method of production
The production method that minimizes cost.
production technology
The quantitative relationship between inputs and outputs.
labor-intensive technology
Technology that relies heavily on human labor instead of capital.
capital-intensive
technology
Technology that relies heavily on capital instead of human labor.
production function or total product function
A numerical or mathematical expression of a relationship between inputs and outputs. It shows units of total product as a function of units of inputs.
marginal product
The additional output that can be produced by adding one more unit of a specific input, ceteris paribus.
law of diminishing
returns
When additional units of a variable input are added to fixed inputs, after a certain point, the marginal product of the variable input declines.
