Chapter 7: Production, Cost, and the Perfect Competition Model

Allocative efficiency

marginal cost = marginal value

Marginal cost

cost of producing one more unit

Marginal value

value of one more unit

Technical efficiency

reached when economy’s factors of supply are used to maximize production

Marginal product

additional output produced per period when one more unit of an input is added

Law of diminishing marginal returns

as one amount of an input increases, marginal returns will eventually decrease

Total product curve

shows relationship between total amount of output produced vs. number of units of an input used

Fixed costs

__do not__ change when more output is produced

Variable costs

__do__ change when more output is produced

Short-run

time frame where at least one factor of production is constant

Long-run

all factors of production are variable, no fixed costs

Economies of scale

exist over range of output where long-run average cost curve slopes down

Profit

value remaining after paying all costs and financial obligations of a company

Gross profit

total sales - total cost of goods/services

Operating profit

gross profit - operating expenses

Net profit

amount left after deducting all other expenses

Break-even points

points on graph where total revenue = total cost

Profit maximization

loss minimization

Economic profits

total revenue - total cost