competitive market  a market in which no firm has the power to affect the market price of a good.
diminishing returns to labor  a situation in which the incremental increase in output due to a unit increase in labor declines with increasing labor input; a decreasing marginal product of labor.
firm  an organization that produces goods or services.
fixed costs  costs of production that do not depend on the quantity of production.
marginal cost  the change in total costs due to a one-unit change in quantity produced.
marginal product of labor  the change in production due to a one-unit increase in labor input.
marginal revenue  the change in total revenue due to a one-unit increase in quantity sold.
price-taker  any firm that takes the market price as given; this firm cannot affect the market price because the market is competitive.
producer surplus  the difference between the price received by a firm for an additional item sold and the marginal cost of the item’s production; for the market as a whole, it is the sum of all the individual firms’ producer surpluses, or the area above the market supply curve and below the market price.
production function  a relationship that shows the quantity of output for any given amount of input.
profit maximization  an assumption that firms try to achieve the highest possible level of profits—total revenue minus total costs—given their production function.
profits  total revenue received from selling the product minus the total costs of producing the product.
total costs  the sum of variable costs and fixed costs.
total revenue  the price per unit times the quantity the firm sells.
variable costs  costs of production that vary with the quantity of production.