Micro ch07

LAU ECO201 Ch07

Profit Maximization

The primary objective of firms to earn the maximum profit by determining the optimal level of output.

Economic Profit

Profit that accounts for both explicit costs and opportunity costs of all factors of production.

Total Revenue

The total amount received from the sale of goods or services (calculated as quantity sold times price per unit).

Total Cost

The sum of all costs incurred in the production of goods, including both out-of-pocket costs and opportunity costs.

Short Run

A time period in which at least one factor of production is fixed and cannot be changed.

Long Run

A time period in which all factors of production can be varied, allowing firms to enter or exit the industry.

Marginal Product

The additional output produced by adding one more unit of a specific input, assuming other inputs remain unchanged.

Law of Diminishing Returns

The principle stating that as more units of a variable input are added to fixed inputs, the additional output produced will eventually decrease.

Labor-Intensive Technology

Production technology that relies heavily on human labor rather than capital.

Capital-Intensive Technology

Production technology that relies heavily on capital rather than human labor.

Normal Rate of Return

The minimum return on investment necessary to keep owners and investors satisfied, often comparable to the risk-free rate of return.

Production Function

A mathematical representation showing the relationship between inputs used in production and the output produced.

Optimal Method of Production

The production technique that minimizes costs for a given level of output.

Opportunity Cost

The cost of forgoing the next best alternative when making a decision.

Average Product

The output produced per unit of a variable factor, calculated as total product divided by the number of units of the variable input.

Total Revenue Formula

Total Revenue (TR) = Quantity Sold (Q) × Price Per Unit (P)

Profit Formula

Profit (π) = Total Revenue (TR) - Total Cost (TC)

Average Cost Formula

Average Cost (AC) = Total Cost (TC) / Quantity Produced (Q)

Marginal Cost Formula

Marginal Cost (MC) = Change in Total Cost (ΔTC) / Change in Quantity (ΔQ)