[ECON 11] The Production Process

production

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

households

Entities that engage in transforming factors of

production into useful things. i.e gardening

not

Production is _____ limited to firms.

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. They almost always exist to make a profit.

how much output to supply?, which production technology to use?, and how much of each input to demand

These are the three decisions that a firm must make to achieve their primary objective—maximum profit.

profit/economic profit

The difference between total revenue and total cost.

total revenue

The amount received from the sale of the product

q x P

Formula for total revenue

total cost/total economic cost

The total of out-of-pocket costs or explicit cost, normal rate of return on capital, and opportunity cost of each factor of production or implicit cost.

normal rate of return

Annual flow of income generated by an investment.

same

For relatively risk-free firms, it should be the _____ as the interest rate on risk-free government bonds.

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.

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.

potential revenues

Output price determines _____.

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/total product function

A numerical or mathematical expression of a relationship between inputs and outputs.

function of units of inputs

A production function shows units of total product as a _____.

marginal product

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

always; every

Diminishing returns _____ apply in the short run, and in the short run _____ firm will face diminishing returns.

average product

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

isoquant

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

isocost

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