Chapter 7 - The Production Process: The Behavior of Profit-Maximizing Firms Flashcards Preview

Principles of Economic > Chapter 7 - The Production Process: The Behavior of Profit-Maximizing Firms > Flashcards

Flashcards in Chapter 7 - The Production Process: The Behavior of Profit-Maximizing Firms Deck (21):
1

production

The process by which inputs are combined, transformed, and turned into outputs.

2

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.

3

profit (economic profit)

The difference between total revenue and total cost.

4

total revenue

The amount received from the sale of the product (q * P).

5

total cost (total economic cost)

The total of (1) out-of- pocket costs and (2) opportunity cost of all factors of production.

6

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.

7

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.

8

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.

9

optimal method of production

The production method that minimizes cost.

10

production technology

The quantitative relationship between inputs and outputs.

11

labor-intensive technology

Technology that relies heavily on human labor instead of capital.

12

capital-intensive
technology

Technology that relies heavily on capital instead of human labor.

13

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.

14

marginal product

The additional output that can be produced by adding one more unit of a specific input, ceteris paribus.

15

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.

16

average product

The average amount produced by each unit
of a variable factor of production.

17

isocost line

A graph that shows all the combinations of capital and labor available for a given total cost.

18

isoquant

A graph that shows all the combinations of capital and labor that can be used to produce a given amount of output.

19

marginal rate of technical substitution

The rate at which a firm can substitute capital for labor and hold output constant.

20

Slope of isoquant

∆K / ∆L = – MP(sub L) / MP(sub K)

21

slope of isocost line

∆K / ∆L = – (TC/P(sub K)) / (TC/P(sub L)) = – P(sub L) / P(sub K)