Chapter 4 Key Terms & Definitions

A collection of essential economic terms and their definitions related to production and costs.

Factor of Production

An input used in the production of a good or service.

Fixed Cost

The sum of all payments made to the firm’s fixed factors of production.

Fixed Factor of Production

An input whose quantity cannot be altered in the short run.

Imperfectly Competitive Firm (or Price Setter)

A firm that has at least some control over the market price of its product.

Law of Diminishing Returns

A principle stating that increased production of a good eventually requires larger increases in a variable factor when some factors are fixed.

Long Run

A period long enough that all the firm’s factors of production are variable.

Marginal Cost

The increase in total cost that results from carrying out one additional unit of an activity.

Perfectly Competitive Market

A market in which no individual supplier has significant influence on the market price of the product.

Perfectly Elastic Supply

Supply is perfectly elastic if elasticity of supply is infinite.

Perfectly Inelastic Supply

Supply is perfectly inelastic if elasticity is zero.

Price Elasticity of Supply

The percentage change in quantity supplied that occurs in response to a 1 percent change in price.

Price Taker

A firm that has no influence over the price at which it sells its product.

Profit

The total revenue a firm receives from the sale of its product minus all costs incurred.

Profit-Maximizing Firm

A firm whose primary goal is to maximize the difference between its total revenues and total costs.

Short Run

A period short enough that at least some of the firm’s factors of production are fixed.

Total Cost

The sum of all payments made to the firm’s fixed and variable factors of production.

Variable Cost

The sum of all payments made to the firm’s variable factors of production.

Variable Factor of Production

An input whose quantity can be altered in the short run.