Unit 3 Costs, Production, and Perfect Competition

Marginal product of labor

The additional output produced as a result of adding one more unit of labor.

Increasing marginal returns of labor

A situation in which each additional unit of labor results in a larger increase in output.

Decreasing marginal returns of labor

A situation where adding more labor leads to smaller increases in output.

Production function

A mathematical relationship that describes how inputs are converted into outputs.

Long-run production function

Describes the relationship between inputs and outputs when all inputs can be varied.

Short run production function

Describes the relationship between inputs and outputs when at least one input is fixed.

Economies of scale production

Cost advantages that firms experience as their output increases.

Diseconomies of scale

Increases in per-unit costs as a firm increases its output.

Constant returns to scale

A situation where increasing inputs by a certain percentage results in output increasing by the same percentage.

Minimum efficient scale

The smallest quantity of output at which long-run average costs are minimized.

Variable cost

Costs that change with the level of output produced.

Marginal cost

The cost of producing one additional unit of output.

Fixed cost

Costs that do not change with the level of output.

Total cost

The sum of fixed costs and variable costs at a given level of output.

Average cost

Total cost divided by the quantity of output produced.

Revenue

The income generated from the sale of goods or services.

Explicit costs

Direct, out-of-pocket costs for a business, such as wages and rent.

Implicit costs

Indirect costs that represent lost opportunities, such as the owner's time or forgone income.

Accounting profit

Total revenue minus explicit costs.

Economic profit

Total revenue minus total costs, including both explicit and implicit costs.

Normal profit

The minimum level of profit needed for a company to remain competitive in the market.

Marginal revenue

The additional revenue that will be generated by increasing product sales by one unit.

Profit max point

The level of production at which a firm earns the highest possible profit.

Perfectly competitive market

A market structure where many firms offer a homogeneous product, and no single firm can influence the market price.

Commodity

A basic good used in commerce that is interchangeable with other goods of the same type.

Barriers to entry

Obstacles that make it difficult to enter a market, such as high startup costs or strict regulations.

Allocative efficiency

A state of the economy in which production represents consumer preferences; goods are distributed in a way that maximizes consumer satisfaction.

Productive efficiency

A situation that occurs when a firm produces at the lowest possible cost.