The Production Process

Average product is

- the amount produced by each unit of a variable factor of production -total product/total units of labor -if marginal product is below average product, the average product falls; if marginal product is above average product, the average product rises

Three decisions a firm must make:

1) how much output to supply 2) which production technology to use 3) how much of each input to demand

Production

A process when firms take inputs and transform them into outputs

MC=MR

Breakeven; the goal of every firm

TC=

TFC+TVC

AFC=

TFC/q

law of diminishing returns

after a certain point, when additional units of a variable input are added to fixed inputs, the marginal product of the variable input declines

rate of return

annual flow of net income generated by an investment expressed as a percentage of the total investment.

Fixed costs

cant be avoided in the short run; there are no fixed costs in the long run -something you will always need to pay (electric bills, rent, etc.) because you cant exit in the short run

Variable cost

cost that depends on the level of production chosen

TFC

costs that dont change with output, even if output is zero

MC < MR

dont want to pay more than you earn

out of pocket costs are sometime referred to as

explicit costs or accounting costs -economic costs include the opportunity cost of every input --these opportunity costs are often referred to as implicit costs

Marginal Cost

increase in total cost that results from the production of 1 more unit of input

optimal method of production

minimizes cost

In a perfect competition,...

no single firm has any control over prices. Follows from 2 assumptions: 1) PCI are composed of many firms, each small relative to the size of the industry 2) each firm in a PCI produces homogeneous products

MC> MR

not good

The Demand curve facing a competitive firm is

perfectly elastic so if a firm raises its price above the market price, it will sell nothing.(it can sell all it produces at the market price, a firm has no reason to reduce its price)

normal rate of return

rate that is sufficient to keep owners and investors satisfied

total revenue

the amount received from the sale of the product (quantity x price)

short run

the period of time for which two conditions hold: the firm is operating under a fixed scale (fixed factor) of production, and firms can neither enter nor exit an industry --has some fixed factor of production

Firms look to output markets for to input markets for

the price of output the prices of capital and labor

total cost

the total of 1) out of pocket costs and 2) opportunity cost of all factors of production

Profit:

total revenue-total cost