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