Microeconomics: Production and Perfect Competition

Firm (Producer)

Organization combining labor, capital, land, and materials to produce outputs.

Explicit Costs

Out-of-pocket costs and actual payments like wages and rent.

Implicit Costs

Opportunity costs of using resources the firm already owns.

Accounting Profit

Total revenue minus explicit costs.

Economic Profit

Total revenue minus both explicit and implicit costs.

Short Run

Period of time during which at least some factors of production are fixed.

Long Run

Period of time during which all factors of production are variable.

Marginal Product (MP)

Additional output produced by employing one more unit of labor.

Formula for Marginal Product (MP)

Change in total product / change in labor

Law of Diminishing Marginal Productivity

As more labor is employed, additional output eventually declines.

Fixed Costs

Expenditures that do not change regardless of the level of production.

Variable Costs

Costs of variable inputs like labor that change with production.

Average Total Cost (ATC)

Total cost divided by the quantity of output produced.

Formula for Average Total Cost (ATC)

Total cost / quantity produced

Marginal Cost (MC)

Additional cost of producing one more unit of output.

Formula for Marginal Cost (MC)

Change in total cost / change in quantity

Average Variable Cost (AVC)

A firm's total variable costs divided by the quantity of output produced.

Economies of Scale

Situation where as the quantity of output goes up, cost per unit goes down.

Diseconomies of Scale

Long-run average cost increases as total output increases due to management size issues.

Constant Returns to Scale

Expanding all inputs proportionately does not change the average cost of production.

Price Taker

A firm in a perfectly competitive market that takes the prevailing market price as given.

Profit Maximization Rule

Maximum profit occurs where price equals marginal revenue and marginal cost (P = MR = MC).

Shutdown Point

Intersection of the average variable cost curve and the marginal cost curve.

Break-Even Point

Level of output where marginal cost intersects the average cost curve at its minimum.

Productive Efficiency

Producing goods and services at the lowest possible average cost without waste.

Allocative Efficiency

Achieved when price equals marginal cost, aligning social benefits and costs.

Constant-Cost Industry

Industry where an increase in demand leaves the cost of production unchanged.

Fixed Inputs

Factors of production that can’t be easily increased/decreased in a short period of time

Variable Inputs

Factors of production that can easily increase/decrease in a short period of time.