Principles of Microeconomics - The Production Process: The Behavior of Profit-Maximizing Firms

Firm: An organization formed by individuals to produce goods/services to meet demand.
Production: The process combining inputs to transform them into outputs.
Firm's Incentives: Firms aim to maximize profits and minimize costs.

Profit: Difference between total revenue and total cost.
Total Revenue: The total income from sales of the product, calculated as: \text{Total Revenue} = \text{Price per Unit} \times \text{Quantity of Output}
Total Cost: Sum of total fixed costs and total variable costs.
Economic Profit: Takes into account both explicit costs and opportunity costs.
Opportunity Cost of Capital: Includes a normal rate of return, which is the return sufficient to keep investors satisfied and close to the risk-free interest rate on government bonds.

Short Run: Period where a firm cannot change fixed factors of production and cannot exit/enter the market.
Long Run: Period where all production factors are variable; firms can adjust scale and new firms may enter or exit the market.

Firms make decisions based on:
- Market Price of Output: Impacts potential revenues.
- Production Techniques Available: Determines input requirements.
- Input Prices: Directly affect costs.
Optimal Method of Production: Technique that minimizes costs for a set output level.

Production Technology: Refers to the quantitative input-output relationship.
- Labor-Intensive Technology: Heavily relies on human labor.
- Capital-Intensive Technology: Heavily relies on capital investment.

Production Function / Total Product Function: A mathematical expression showing units of total product as a function of input units.
Marginal Product: Additional output produced by one more unit of a specific input (ceteris paribus).
Law of Diminishing Returns: As variable input quantities increase with fixed inputs, the marginal product eventually decreases; this principle applies universally in the short run.
Graphing Production Functions: When the marginal product is above the average product, the average increases, and vice versa.

Joint Inputs: Capital and labor work jointly in production.
Productivity Impact: Increased capital generally enhances labor productivity.

Firms determine the most suitable production technique based on cost minimization for a specific output level.

Isoquant: A graph depicting all combinations of capital and labor that produce a specific quantity of output.
Isocost Line: A graph representing all combinations of capital and labor available at a specific total cost.
Cost-Minimizing Equilibrium: Firms determine least-cost production by finding the tangential point where an iso