Theory of the Firm - Lecture 7

These flashcards cover key terms and concepts from the lecture on the Theory of the Firm, focusing on production, costs, and profit maximization.

Production

The process of combining inputs to make goods and services.

Inputs of Production

Land, labour, capital, and entrepreneurship used in the production process.

Technology

The methods available for turning inputs into output.

Production Function

Indicates the maximum goods and services a firm can produce for each combination of inputs over a given period.

Short Run

The time period during which at least one of the firm’s inputs is fixed.

Long Run

The time period long enough for a firm to vary all its inputs.

Fixed Input

An input whose quantity remains constant regardless of production levels.

Variable Input

An input whose usage changes as the level of output changes.

Total Product

The maximum quantity of output produced from a given combination of inputs.

Marginal Product of Labour (MPL)

The increase in total output when an additional worker is hired.

Law of Diminishing Marginal Returns

As more of any input is added to a fixed amount of other inputs, its marginal product will eventually decline.

Sunk Cost

A cost that has already been paid and should not be factored into future decisions.

Explicit Cost

Money that is actually paid out for the use of inputs.

Implicit Cost

The opportunity costs of using inputs for which there is no direct money payment.

Average Total Cost (ATC)

Total cost per unit of output.

Marginal Cost (MC)

The increase in total cost from producing one more unit of output.

Profit Maximization

The goal of a firm to maximize its owners' profit by finding the optimal output level where total revenue exceeds total costs.

Economic Profit

Total revenue minus all costs of production, including both explicit and implicit costs.

Accounting Profit

Total revenue minus explicit costs of production.

Shutdown Rule

In the short run, a firm should continue to produce if its total revenue exceeds total variable costs.