Micro Ch.2 Production,Costs revenue and profits

Production

The process of transforming inputs (factors) into outputs (goods and services).

Marginal Cost

The cost of producing one additional unit of a good or service.

Total Product

The total quantity of output produced by a firm.

Average Cost

Computed as total cost divided by the number of units produced.

Fixed Costs

Costs that do not change regardless of the level of output.

Variable Costs

Costs that change with the level of output.

Opportunity Cost

The loss of potential gain from other alternatives when one alternative is chosen.

Diminishing Returns

As additional units of a variable input (e.g., labor) are added to fixed inputs (e.g., land), the additional output produced from each additional unit eventually decreases.

Economies of Scale

The reduction in average cost per unit as the scale of production increases.

Diseconomies of Scale

The increase in average costs per unit when a firm grows too large.

Marginal Product

The additional output resulting from increasing the input of a variable factor by one unit.

Average Product

The output produced per unit of variable input.

Total Revenue

The total income generated from the sale of goods or services, calculated as price times quantity sold (TR = P x Q).

Economic Profit

Total revenue minus total costs, including both explicit and implicit costs.

Accounting Profit

Total revenue minus only explicit costs.

Normal Profit

The minimum profit necessary for a company to remain competitive in the market, equivalent to total revenues equaling total costs.

Marginal Revenue

The additional revenue gained from selling one additional unit of a product.

Price and Output Decision

Determining the optimal price and level of output to maximize profits.

Short-run Production Decision

Decisions made by firms to produce where revenue covers variable costs even if fixed costs cannot be changed.

Long-run Production Decision

Decisions made by firms, in which they can adjust all factors of production to achieve efficiency and profitability.