The Costs of Production and Profit Maximization

These flashcards cover key concepts tied to production costs and the principles of profit maximization as discussed in the lecture.

What is the primary objective of a private business owner according to Chapter 3?

The primary objective is to maximize profits.

What are the two main categories of costs of production?

Fixed costs and variable costs.

What are fixed costs?

Costs that do not vary with increases in the quantity produced.

What are variable costs?

Costs that do vary with increases in the quantity produced.

What type of cost cannot be recovered once incurred?

Sunk cost.

In economic terms, how is the short run defined?

The short run is a time horizon where some fixed costs exist and cannot be changed.

How is average fixed cost calculated?

Average fixed cost equals fixed cost divided by the quantity produced.

What does marginal cost represent?

Marginal cost is the change in total cost that arises from an extra unit of production.

What is the profit maximizing rule?

A business maximizes profits when it produces where the marginal revenue equals the marginal cost.

In a perfectly competitive industry, what is a key difference between businesses in terms of pricing?

Businesses are price takers, meaning they cannot influence the market price.

What happens to total revenue when market price is fixed and quantity changes in a perfectly competitive market?

Total revenue changes in direct proportion to the quantity sold at the fixed market price.

What is the short-run shut-down rule?

A business should shut down if revenue is less than variable costs at the profit maximizing quantity.

What defines a monopolistic industry?

There are many buyers and only one seller, the good is heterogeneous, and barriers to enter the market exist.

What are economies of scale?

Economies of scale occur when increasing production lowers the average total cost per unit.

What is the cost advantage of economies of scope?

The ability to produce multiple products together at lower costs than separate production.