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Microeconomics Chapter 7


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What is an organization that comes into being when a person or a group of people decides to produce a good or service to meet a perceived demand?
Why do most firms exist?
to make a profit
What term is the difference between total revenue and total cost?
Economic Profit
What is the amount received from the sale of the product? (q * P)
Total Revenue.
How is total economic cost defined?
(1) out of pocket costs (accounting costs) (2) normal rate of return on capital (3) opportunity cost of each factor of production
what is the rate of return on capital that is just sufficient to keep owners and investors satisfied?
Normal rate of return
What is the defined as the period of time for which two conditions hold: The firm is operating under a fixed scale of production, and firms can neither enter nor exit the industry.
the short run
What is defined as the period of time for which there are no fixed factors of production: Firms can increase or decrease the scale of operation, and new firms can enter and existing firms can exit the industry
The Long Run
What are the three bases of decision making for profit-maximizing firms?
1 The market price of output 2 The techniques of production that are available 3 The prices of inputs
What determines potential revenues?
Output prices
What tells me how much of each input is needed?
The techniques of production that are available
What determines the cost?
Available production techniques and prices of inputs together.
What equation summarizes the various ways a firm can transform inputs into outputs?
Production Function
What is the production function?
Q = f(L,K)
What is the additional output that can be produced by adding one more unit of a specific input?
Marginal Product
What law states that When additional units of a variable input are added to fixed inputs after a certain point, the marginal product of the variable input declines?
Law of diminishing returns.
The average amount produced by each unit of a variable factor of production
Average Product
What is the equation for Average product of Labor?
Average product of Labor = total product/total units of labor
Why does additional capital increase the productivity of labor?
Because capital is of little use without people to operate
Capital and Labor are labeled as what type of inputs?
Complementary inputs
In the long run, both capital and labor are _
What is a graph that shows all the combinations of capital and labor that can be used to produce a given amount of output?
an Isoquant
The farther an isoquant is from the origin, the greater the _
What is the slop of an isoquant called?
The Marginal Rate of Technical Substitution
What does the Marginal Rate of Technical Substitution tell us?
The rate at which a firm can substitute capital for labor and hold output constant
What graph represents all combinations of capital and labor that are available for a given total cost?
the isocost line
In a graph of both Isoquant and Isocost, where will cost be minimized?
at the point of tangency between the two curves.

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