Chapter 7: Production, Costs, and Industry Structure

question

Firm

answer

an organization that combines inputs of labor, capital, land, and raw or finished component materials to produce outputs.

question

Private Enterprise

answer

the ownership of businesses by private individuals

question

Production

answer

he process of combining inputs to produce outputs, ideally of a value greater than the value of the inputs.

question

Production

answer

the process of combining inputs to produce outputs, ideally of a value greater than the value of the inputs.

question

perfect competition

answer

many firms are all trying to sell identical products.

question

Monoploy

answer

only one firm is selling the product, and this firm faces no competition.

question

monopolistic competition

answer

a situation with many firms selling similar, but not identical products.

question

Oligopoly

answer

a situation with few firms that sell identical or similar products.

question

Revenue

answer

the income a firm generates from selling its products.

Total Revenue = Price × Quantity Sold

question

explicit costs

answer

out-of-pocket costs; actual payments.

Wages, rent, etc.

question

implicit costs

answer

the opportunity cost of using resources that the firm already owns.

question

Accounting Profit

answer

the difference between dollars brought in and dollars paid out.

Accounting Profit = Total Revenue - Explicit Costs

question

Economic Profit

answer

includes both explicit and implicit costs.

Economic Profit =Total Revenue - Total Costs

question

factors of production

answer

resources that firms use to produce their products,:

Natural Resources (Land and Raw Materials)

Labor

Capital

Technology

Entrepreneurship

question

production function

answer

mathematical equation that tells how much output (Q) a firm can produce with given amounts of the inputs.

question

Fixed Inputs

answer

factors of production that can't be easily increased or decreased in a short period of time

question

Variable inputs

answer

factors of production that a firm can easily increase or decrease in a short period of time

question

short run

answer

period of time during which at least some factors of production are fixed.

question

Long run

answer

period of time during which all factors are variable.

question

Marginal Product(MP)

answer

the additional output of one more worker.

MP = ΔTP

ΔL

question

Law of Diminishing Marginal Productivity

answer

Law of Diminishing Marginal Productivity - general rule that as a firm employs more labor, eventually the amount of additional output produced declines.

question

factor payments

answer

what the firm pays for the use of the factors of production (aka costs, from the firm's perspective).

Raw materials prices

Rent

Wages and salaries

Interest and dividends

Profit

question

variable costs

answer

costs of the variable inputs, like labor.

question

fixed costs

answer

costs of the fixed inputs, like rent.

Expenditure that a firm must make before production starts

Do not change in the short run

Do not change regardless of the level of production.

question

Total cost

answer

the sum of fixed and variable costs of production

question

Average Total Cost (ATC)

answer

total cost divided by the quantity of output produced.

ATC = TC

Q Typically U-shaped

question

Marginal cost (MC)

answer

the additional cost of producing one more unit of output.

MC = ΔTC

ΔQ Generally upward-sloping

question

Average variable cost

answer

variable cost divided by quantity of output.
-Lies below the average total cost curve and

-Typically U-shaped or upward-sloping.

question

Average Profit or profit margin

answer

price - average cost
if the market price > average cost, then average profit will be positive.

If price is < average cost, then profits will be negative.

question

Production technologies

answer

alternative methods of combining inputs to produce output

question

Economies of scale

answer

the situation where, as the quantity of output goes up, the cost per unit goes down.

question

Constant returns to scale

answer

when expanding all inputs proportionately does not change the average cost of production

question

Diseconomies of scale

answer

the long-run average cost of producing each individual unit increases as total output increases.

1 of 33

question

Firm

answer

an organization that combines inputs of labor, capital, land, and raw or finished component materials to produce outputs.

question

Private Enterprise

answer

the ownership of businesses by private individuals

question

Production

answer

he process of combining inputs to produce outputs, ideally of a value greater than the value of the inputs.

question

Production

answer

the process of combining inputs to produce outputs, ideally of a value greater than the value of the inputs.

question

perfect competition

answer

many firms are all trying to sell identical products.

question

Monoploy

answer

only one firm is selling the product, and this firm faces no competition.

question

monopolistic competition

answer

a situation with many firms selling similar, but not identical products.

question

Oligopoly

answer

a situation with few firms that sell identical or similar products.

question

Revenue

answer

the income a firm generates from selling its products.

Total Revenue = Price × Quantity Sold

question

explicit costs

answer

out-of-pocket costs; actual payments.

Wages, rent, etc.

question

implicit costs

answer

the opportunity cost of using resources that the firm already owns.

question

Accounting Profit

answer

the difference between dollars brought in and dollars paid out.

Accounting Profit = Total Revenue - Explicit Costs

question

Economic Profit

answer

includes both explicit and implicit costs.

Economic Profit =Total Revenue - Total Costs

question

factors of production

answer

resources that firms use to produce their products,:

Natural Resources (Land and Raw Materials)

Labor

Capital

Technology

Entrepreneurship

question

production function

answer

mathematical equation that tells how much output (Q) a firm can produce with given amounts of the inputs.

question

Fixed Inputs

answer

factors of production that can't be easily increased or decreased in a short period of time

question

Variable inputs

answer

factors of production that a firm can easily increase or decrease in a short period of time

question

short run

answer

period of time during which at least some factors of production are fixed.

question

Long run

answer

period of time during which all factors are variable.

question

Marginal Product(MP)

answer

the additional output of one more worker.

MP = ΔTP

ΔL

question

Law of Diminishing Marginal Productivity

answer

Law of Diminishing Marginal Productivity - general rule that as a firm employs more labor, eventually the amount of additional output produced declines.

question

factor payments

answer

what the firm pays for the use of the factors of production (aka costs, from the firm's perspective).

Raw materials prices

Rent

Wages and salaries

Interest and dividends

Profit

question

variable costs

answer

costs of the variable inputs, like labor.

question

fixed costs

answer

costs of the fixed inputs, like rent.

Expenditure that a firm must make before production starts

Do not change in the short run

Do not change regardless of the level of production.

question

Total cost

answer

the sum of fixed and variable costs of production

question

Average Total Cost (ATC)

answer

total cost divided by the quantity of output produced.

ATC = TC

Q Typically U-shaped

question

Marginal cost (MC)

answer

the additional cost of producing one more unit of output.

MC = ΔTC

ΔQ Generally upward-sloping

question

Average variable cost

answer

variable cost divided by quantity of output.
-Lies below the average total cost curve and

-Typically U-shaped or upward-sloping.

question

Average Profit or profit margin

answer

price - average cost
if the market price > average cost, then average profit will be positive.

If price is < average cost, then profits will be negative.

question

Production technologies

answer

alternative methods of combining inputs to produce output

question

Economies of scale

answer

the situation where, as the quantity of output goes up, the cost per unit goes down.

question

Constant returns to scale

answer

when expanding all inputs proportionately does not change the average cost of production

question

Diseconomies of scale

answer

the long-run average cost of producing each individual unit increases as total output increases.

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