The production process: The behavior of profit maximizing firms Flashcards
A firm is ?
An organization that comes into being when a person of a group of people decides to produce a good or a service to meet a perceived demand.
Perfect competition ?
An industry structure in which there are many firms , each small relative to the industry, producing virtually identical products and in which no firm is large enough to have any control over prices.
In perfectly competitive industries ?
New competitors can freely enter and exit the market
We assume that firms are ?
In business to make a profit and that a firm’s behavior is guided by the goal of maximizing profits.
Profit (economic profits) is the difference between ?
Total revenue and total cost.
Profit = TR-TC
Total revenue (TR) ?
The amount received from the sale of the product.
TR = P * Q
Total cost ?
the total of out of pocket costs, normal rate of return on capital and opportunity cost of each factor of production.
Normal rate of return is ?
A rate of return on capital that is just sufficient to keep owners and investors satisfied.
If the level of profit is positive ?
The firm is earning an above normal rate of return on capital.
Positive profits are likely to attract new firms into an industry and cause existing firms to expand.
When a firm suffers negative level of profit ?
It’s earning at a rate below that required to keep investors happy.
Short- run is ?
The period of time for which two conditions hold: the firm is operating under a fixed scale (factor) of production, and firms can neither enter nor exit an industry.
Long-run is ?
The period of time for which there are no fixed factors of production. Firms can increase or decrease scale of operation, and new firms can enter and existing firms can exit the industry.
The optimal method of production ?
The production method that minimizes cost.
Labor-intensive technology ?
A technology that relies heavily on human labor instead of capital.
Capital-intensive technology ?
A technology that relies heavily on capital instead of human labor.
Production function or total product function ?
A mathematical expression of a relationship between inputs and outputs.
The marginal product ?
The additional output that can be produced by adding one more unit of a specific input, ceteris paribus.
The law of diminishing returns ?
When additional units of a variable input are added to fixed inputs after a certain point, the marginal products of the variable input declines.
Eg: An hour spend working at 1 a.m after a long day is likely to be less productive than an hour spent working at 10 a.m
