Production Function and Diminishing Returns

The economic process that describes how businesses convert inputs (labor, raw materials, capital) into outputs (products or services). It helps businesses decide production quantities based on demand.

The ability of a firm to vary its output in response to changes in demand by adjusting the quantities of variable inputs (labor, raw materials), while keeping fixed inputs (machinery) constant.

The goal in the short-run is to minimize the cost of producing a given output level. This means choosing the optimal quantities of variable inputs to keep costs low.

The goal in the short-run is to maximize profits by producing the output where marginal revenue (extra revenue from selling one more unit) equals marginal cost (extra cost from producing one more unit).

The ability of a firm to adjust all inputs (labor, capital, technology) in response to long-term changes in demand or production costs.

In the long-run, the goal is to maximize profits over an extended period by making strategic decisions about production, technology, and market positioning. It involves adjusting all inputs to optimize efficiency and profitability.

The principle that as more units of a variable input are added to a fixed input (e.g., labor to land), the marginal product (extra output from one more unit of input) will eventually decrease. This means adding more units of the variable input will yield diminishing returns.

This stage of production occurs when adding more units of variable input leads to increasing output per unit of input. This is because the fixed input is being utilized more efficiently.

This stage of production occurs when adding more units of variable input leads to decreasing output per unit of input. This is because the fixed input is becoming a constraint, leading to diminishing returns.

This stage of production occurs when adding more units of variable input leads to a decrease in total output. This is because the fixed input is heavily overloaded, leading to negative returns.

The total cost of all variable inputs used in production, such as labor, raw materials, and energy.

The total cost of all fixed inputs used in production, such as land, buildings, and machinery.

The sum of total variable cost and total fixed cost. Represents the total cost of producing a specific level of output.

The average variable cost per unit of output. It is calculated by dividing total variable cost by the quantity of output produced.

The average fixed cost per unit of output. It is calculated by dividing total fixed cost by the quantity of output produced.

The average total cost per unit of output. It is calculated by dividing total cost by the quantity of output produced.

The additional cost of producing one more unit of output. It is calculated by dividing the change in total cost by the change in quantity.

A market structure characterized by a large number of small firms selling identical products, with free entry and exit. Each firm is a price taker.

A market structure characterized by a large number of firms selling differentiated products. Each firm has some market power, but faces competition.

A market structure characterized by a few large firms dominating the market, with high barriers to entry. Firms often engage in strategic competition.

A market structure characterized by a single firm controlling the entire market for a product with no close substitutes.

A market structure with only one buyer for a particular good or service. The buyer can dictate the price and quantity.

A market structure with a few large buyers for a particular good or service. They have significant bargaining power and can affect the price and quantity.

Costs that involve actual monetary payments made by a firm, such as wages, rent, and raw materials.

Costs that represent the opportunity cost of using resources already owned by a firm, such as using a personal car for work.

A firm's total revenue minus its explicit costs. Represents the cash difference between revenue and expenses.

A firm's total revenue minus its total costs, including both explicit and implicit costs. Represents the true economic gain or loss from a business.

The classification of markets based on the degree of competition, the number of firms, and the nature of products sold. Types include perfect competition, monopolistic competition, oligopoly, and monopoly.

The classification of markets that do not meet the rigorous conditions of perfect competition. They are characterized by limited competition, barriers to entry, differentiated products, and a small number of buyers and sellers.

A group of independent businesses that collude to manipulate the price of a product or service. They reduce competition and can hurt consumers with increased prices and lack of transparency.