4.1-4.3

What is a production function?

It is the relationship between the quantity of inputs a firm uses and the quantity of output it produces.

Define fixed input.

A fixed input is an input whose quantity is fixed for a period of time and cannot be varied.

What is a variable input?

A variable input is an input whose quantity the firm can vary at any time.

Differentiate between the long run and short run in production.

The long run is the time period in which all inputs can be varied, while the short run is the time period in which at least one input is fixed.

What does the total product curve depict?

It shows how the quantity of output depends on the quantity of the variable input for a given quantity of the fixed input.

What is marginal product?

The marginal product of an input is the additional quantity of output produced by using one more unit of that input.

What are diminishing returns to an input?

Diminishing returns occur when an increase in the quantity of that input, holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input.

What is a fixed cost (FC)?

A fixed cost is a cost that does not depend on the quantity of output produced.

Define average total cost (ATC).

The average total cost is the total cost divided by the quantity of output produced.

What characterizes economies of scale?

Economies of scale occur when long run average total cost declines as output increases.

What is the profit-maximizing rule?

A profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost.

What does it mean when a firm's marginal cost equals average total cost?

It corresponds to the minimum-cost output where average total cost is at its lowest.

What is the difference between accounting profit and economic profit?

Accounting profit is total revenue minus explicit costs, while economic profit is total revenue minus the opportunity cost of all resources, including implicit costs.

What is the principle of marginal analysis?

Every activity should continue until the marginal benefit equals the marginal cost.

What defines a perfectly competitive market?

A perfectly competitive market is one in which all consumers and producers are price takers.

What is the significance of the minimum efficient scale?

It is the smallest quantity at which a firm's long run average total cost is minimized.

What happens to a firm if the market price falls below its minimum average total cost?

The firm will suffer losses and may exit the industry in the long run.

What does allocative efficiency indicate?

Allocative efficiency is achieved when the goods and services produced are those most valued by society.

What is a sunk cost?

A sunk cost is a cost that has already been incurred and cannot be recovered.