Microeconomics Chapter 7
Terms
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- What is 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?
- Firm
- Why do most firms exist?
- to make a profit
- What term is the difference between total revenue and total cost?
- Economic Profit
- What is the amount received from the sale of the product? (q * P)
- Total Revenue.
- How is total economic cost defined?
- (1) out of pocket costs (accounting costs) (2) normal rate of return on capital (3) opportunity cost of each factor of production
- what is the rate of return on capital that is just sufficient to keep owners and investors satisfied?
- Normal rate of return
- What is the defined as the period of time for which two conditions hold: The firm is operating under a fixed scale of production, and firms can neither enter nor exit the industry.
- the short run
- What is defined as the 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
- The Long Run
- What are the three bases of decision making for profit-maximizing firms?
- 1 The market price of output 2 The techniques of production that are available 3 The prices of inputs
- What determines potential revenues?
- Output prices
- What tells me how much of each input is needed?
- The techniques of production that are available
- What determines the cost?
- Available production techniques and prices of inputs together.
- What equation summarizes the various ways a firm can transform inputs into outputs?
- Production Function
- What is the production function?
- Q = f(L,K)
- What is the additional output that can be produced by adding one more unit of a specific input?
- Marginal Product
- What law states that When additional units of a variable input are added to fixed inputs after a certain point, the marginal product of the variable input declines?
- Law of diminishing returns.
- The average amount produced by each unit of a variable factor of production
- Average Product
- What is the equation for Average product of Labor?
- Average product of Labor = total product/total units of labor
- Why does additional capital increase the productivity of labor?
- Because capital is of little use without people to operate
- Capital and Labor are labeled as what type of inputs?
- Complementary inputs
- In the long run, both capital and labor are _
- Variable
- What is a graph that shows all the combinations of capital and labor that can be used to produce a given amount of output?
- an Isoquant
- The farther an isoquant is from the origin, the greater the _
- output
- What is the slop of an isoquant called?
- The Marginal Rate of Technical Substitution
- What does the Marginal Rate of Technical Substitution tell us?
- The rate at which a firm can substitute capital for labor and hold output constant
- What graph represents all combinations of capital and labor that are available for a given total cost?
- the isocost line
- In a graph of both Isoquant and Isocost, where will cost be minimized?
- at the point of tangency between the two curves.