Production
the process by which inputs are combined, transformed, and turned into outputs
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
Profit
the difference between total revenue and total cost
Total revenue
the amount received form the sale of the product
Total cost
the total of 1. out of the pocket costs and 2. opportunity cost of all factors of production
Rate of return
annual flow of net income generated by an investment expressed as a percentage of the total investment (also called the yield)
Normal rate of return
a rate of return on capital that is just sufficient to keep owners and investors satisfied
Short run
the period of time for which two conditions hold 1. the firm is operating under a fixed scale (fixed factor) of production and 2. firms can neither enter nor exit an industry
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
Optimal method of production
the production method that minimizes cost
Production technology
the quantitative relationship between inputs and outputs
Labor-intensive technology
technology that relies heavily on human labor instead of capital
Capital-intensive technology
technology that relies heavily on capital instead of human labor
Production function
a numerical or mathematical expression of a relationship between inputs and outputs
Marginal product
the additional output that can be produced by adding one more unit of a specific inputs, ceteris paribus
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
Average product
the average amount produced by each unit of a variable factor of production
Fixed cost
any cost that does not depend on the firm's level of output. These costs are incurred even if the firm is producing nothing
Variable cost
a cost that depends on the level of production chosen
Total cost
total fixed cost plus total variable costs
Total fixed costs(TFC) or overhead
the total of all costs that do not change with output even if output is zero
Average fixed cost (AFC)
total fixed cost divided by the number of units of output; a per-unit measure of fixed costs
Spreading overhead
the process of dividing total fixed costs by more units of output
Total variable cost (TVC)
the total of all costs that vary with output in the short run
Total variable cost curve
a graph that shows the relationship between total variable cost and the level of a firm's output
Marginal cost (MC)
the increase in total cost that results from producing 1 more unit of output
Average variable cost (AVC)
total variable cost divided by the number of units of output
Average total cost (ATC)
total cost divided by the number of units of output
Perfect competition
an industry structure in which there are many firms, each small relative to the industry, producing identical products and in which no firm is large enough to have any control over prices
Homogenous products
undifferentiated products; products that are identical to, or indistinguishable from, one another
Total revenue (TR)
the total amount that a firm takes in from the sale of its product: the price per unit times the quantity of output the firm decides to produce
Marginal revenue (MR)
the additional revenue that a firm takes in when it increases output by one additional unit