[MICRO] 04 - The Behaviour of Profit Maximizing Firms Flashcards
3 Basic Decisions of Profit Maximizing Firms
1) How much output to supply
2) Which production technology to use
3) How much of each input to demand
Definition: economic profit
profit = total revenue - total cost
Definition: Total Revenue
The amount recieved from the sale of the product (q*P)=
Definition: Total Cost
The total out-of-pocket costs, normal rate of return on capital and opportunity cost of each factor of production.
Definition: 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.
Definition: Short Run
The period of time where two conditions hold: The firm is operating under a fixed factor of production and firms can neither enter nor exit an industry
Definition: Long Run
The period of time where 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 leave the industry.
Definition: Production Technology
The quanitative relationship between inputs and outputs.
Definition: Marginal Product
The additional output that can be produced by adding one more unit of a specific input. Assuming ceteris paribus.
Definition: 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.
Definition: Average Product
The average amount produced by each unit of a variable factor of production.
Definition: Production Function/Total Product Function
A mathematical expression of a relationship between inputs and outputs. It shows units of total product as a function of units of inputs.
