PROFIT MAXIMIZING FIRM Flashcards
What is the definition of production in economics?
Production is the process of converting inputs into outputs to create goods and services.
What are the primary inputs in the production process?
The primary inputs are land, labor, capital, and entrepreneurship.
True or False: Outputs are the final goods and services produced from inputs.
True
Fill in the blank: In the short run, at least one input is ______.
fixed
What is the difference between the short run and the long run in production?
In the short run, at least one input is fixed, while in the long run, all inputs can be varied.
What is meant by diminishing marginal returns?
Diminishing marginal returns occur when adding an additional factor of production results in a smaller increase in output.
What is a production function?
A production function is a mathematical representation that shows the relationship between inputs and the maximum output that can be produced.
Which input is generally considered the most flexible in the long run?
Labor is generally considered the most flexible input in the long run.
What is total product?
Total product is the total quantity of output produced by a firm using a given quantity of inputs.
True or False: In the long run, firms can adjust all inputs to optimize production.
True
What is average product?
Average product is the output produced per unit of input, calculated by dividing total product by the number of units of input used.
What does the term ‘fixed costs’ refer to?
Fixed costs are expenses that do not change with the level of output produced.
What are variable costs?
Variable costs are expenses that vary directly with the level of output produced.
Fill in the blank: The long run is a period in which all factors of production can be ______.
changed
What is marginal product?
Marginal product is the additional output produced by adding one more unit of a specific input while keeping other inputs constant.
What is the law of variable proportions?
The law of variable proportions states that as more units of a variable input are added to a fixed input, the output will increase up to a certain point, beyond which the marginal returns will decline.
True or False: In the short run, firms can change their fixed inputs.
False
What is the relationship between inputs and outputs known as?
The relationship is known as the production relationship.
What is the significance of the production possibilities frontier?
The production possibilities frontier illustrates the maximum feasible quantity of two goods that can be produced with available resources.
What are economies of scale?
Economies of scale are the cost advantages that a firm experiences as it increases its level of output.
What are diseconomies of scale?
Diseconomies of scale occur when a firm grows so large that the costs per unit increase.
Fill in the blank: The point at which total product is maximized is called the ______ point.
optimal
What is the concept of opportunity cost?
Opportunity cost is the value of the next best alternative that is forgone when making a decision.
True or False: Short-run production decisions are often based on fixed costs.
True
What is the significance of the break-even point in production?
The break-even point is the level of production at which total revenues equal total costs, resulting in neither profit nor loss.
What are fixed inputs?
Inputs that do not change with the level of output.
What are variable inputs?
Inputs that change with the level of output.
True or False: Fixed inputs can be altered in the short run.
False.
What is an example of a fixed input?
Rent for factory space.
What is an example of a variable input?
Raw materials used in production.
Fill in the blank: The total cost of production includes both fixed and __________ costs.
variable.
What are explicit costs?
Direct, out-of-pocket expenses for resources.
What are implicit costs?
Opportunity costs of using resources owned by the firm.
True or False: Implicit costs are recorded in financial statements.
False.
Which type of cost is typically easier to quantify: explicit or implicit?
Explicit.
Fill in the blank: __________ costs are associated with the use of owned resources.
Implicit.
What is the main difference between explicit and implicit costs?
Explicit costs involve direct payments, while implicit costs represent lost opportunities.
True or False: All fixed costs are explicit costs.
False.
What is an example of an implicit cost?
The income foregone from not renting out a building owned by the firm.
What is the relationship between fixed inputs and long-term production?
Fixed inputs can be adjusted in the long term.
Fill in the blank: __________ costs must be paid regardless of the level of production.
Fixed.
In the short run, which type of cost is considered a sunk cost?
Fixed costs.
What happens to variable costs as production increases?
They increase.
True or False: A firm can increase its variable inputs without affecting fixed inputs.
True.
Which type of cost is typically associated with labor in a production process?
Variable costs.
What is the concept of opportunity cost?
The cost of the next best alternative foregone.
Fill in the blank: __________ costs are often considered when evaluating business decisions.
Implicit.
True or False: All implicit costs are fixed costs.
False.
What role do fixed and variable inputs play in determining overall production costs?
They together define the total cost structure of production.
What is the significance of understanding fixed and variable inputs in business?
It helps in budgeting and financial planning.
Which costs are more controllable in the short run: fixed or variable?
Variable costs.
What is the primary focus when calculating economic profit?
Both explicit and implicit costs.
What is total product?
Total product refers to the total quantity of output produced by a firm using a given quantity of inputs.
What is average product?
Average product is the total product divided by the number of units of a variable input used.
What is marginal product?
Marginal product is the additional output produced as a result of employing one more unit of a variable input.
True or False: Marginal product can be negative.
True
Fill in the blank: The formula for average product is ___ divided by the quantity of input used.
Total product
What happens to marginal product as more units of input are added, assuming other inputs remain constant?
Marginal product initially increases, then may decrease due to diminishing returns.
Define diminishing marginal returns.
Diminishing marginal returns occur when the addition of input results in a smaller increase in output.
How is total product calculated?
Total product is calculated by summing the outputs produced at each level of input usage.
True or False: Average product can never exceed marginal product.
False
What is the relationship between marginal product and average product when average product is increasing?
When average product is increasing, marginal product is above average product.
What does it indicate if marginal product is less than average product?
It indicates that average product is decreasing.
What is the significance of the point where marginal product equals average product?
It is the point at which average product is maximized.
Fill in the blank: The total product curve typically has a ___ shape due to the law of diminishing returns.
S-shaped
What can cause an increase in total product?
An increase in the quantity or quality of inputs can cause an increase in total product.
What is the unit of measurement for total product?
Total product is typically measured in physical units of output, such as tons or units produced.
Define the term ‘production function’.
A production function describes the relationship between inputs used in production and the resulting output.
What is the impact of technological advancement on total product?
Technological advancement can increase total product by improving the efficiency of inputs.
True or False: Average product can be calculated for both fixed and variable inputs.
True
What is the average product if total product is 100 and 5 units of input are used?
20
How do you determine the marginal product from total product data?
Marginal product is determined by calculating the change in total product resulting from a one-unit increase in input.
What is the typical behavior of marginal product in the short run?
Marginal product usually increases initially and then decreases due to diminishing returns.
Fill in the blank: When total product is at its maximum, marginal product is ___ .
Zero
What is the graphical representation of total product, average product, and marginal product?
They are typically represented on a graph with total product as a curve, and average and marginal product as lines.
What does a downward-sloping marginal product curve indicate?
It indicates diminishing marginal returns as more of the input is used.
