Microeconomics Exam
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| Economic costs | A payment that must be made to obtain and retain the services of a resource; the income a firm must provide to a resource supplier to attract the resource from an alternative use.
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| Explicit costs | The monetary payment made by a firm to an outsider to obtain a resource.
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| Implicit costs | The monetary income a firm sacrifices when it uses a resource it owns rather than supplying the resource in the market; includes a normal profit.
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| Accounting profit | The total revenue of a firm less its explicit costs; the profit (or net income) that appears on accounting statements for tax purposes.
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| Normal profit | The payment made by a firm to obtain and retain entrepreneurial ability.
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| Economic profit | The return flowing to those who provide the economy with the economic resources of entrepreneurial ability; the total revenue of a firm less its economic costs (which include both implicit and explicit costs).
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| Short run | A period of time in which producers are able to change the quantities of some but not all of the resources they employ; some resources are fixed and some are variable.
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| Long run | A period of time long enough to enable producers of a product to change the quantities of all the resources they employ, so that all resources and costs are variable and none are fixed.
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| Total product (TP) | The total output of a particular good or service produced by a firm (or group of firms in the entire economy)
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| Marginal product (MP) | The additional output produced when one additional unit of a resource is employed (the quantity of all other resources employed remaining constant); equal to the change in total product divided by the change in a quantity of a resource employed.
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| Average product (AP) | The total output produced per unit of a resource employed (total product divided by the quantity of that employed resource)
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| Law of diminishing returns | As successive units of a variable resource (say, labor) are added to a fixed resource (say, land or capital), beyond some point the extra, or marginal, product that can be attributed to each additional unit will decline.
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| Fixed costs | Any cost that in total does change when a firm changes its output.
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| Variable costs | A cost that increases when a firm increases its output, and decreases when a firm decreases its output. (Direct correlation)
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| Total cost | The sum of fixed costs and variable costs.
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| Average fixed cost (AFC) | A firm's total fixed costs divided by its output.
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| Average variable cost (AVC) | A firm's total variable costs divided by its output.
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| Average total cost (ATC) | A firm's total cost divided by it's output.
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| Marginal cost (MC) | The extra (additional) cost of producing 1 more unit of output.
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| Economies of scale | When a firm's ATC of producing a product decreases in the long run as a firm increases its output.
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| Diseconomies of scale | When a firm's ATC of producing a product increases in the long run as a firm increases its output.
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| Constant returns to scale | When a firm's ATC of producing a product remains unchanged in the long run as a firm varies the size of its output.
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| Minimum efficient scale (MES) | The lowest level of output at which a firm can minimize long run ATC.
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| Natural Monopoly | An industry in which economies of scale are so great that a single firm can produce the industry's product at a lower ATC than it would be possible if more than one firm produced the product.
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| Pure competition | Very large number of firms; standardized product; easy entry/exit; very low barriers; seller has no control over the price (price taker);
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| Pure monopoly | One firm sells a unique product, into which entry in blocked; control over price (price maker).
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| Monopolistic competition | Many firms sell a differentiated product; entry is relatively easy; some control over price;
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| Oligopoly | Few firms sell either a standardized or differentiated product; entry is difficult; limited control over price;
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| Imperfect competition | All market structures except pure competition; includes monopoly, monopolistic competition and oligopoly.
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| Price taker | A seller (or buyer) that is unable to affect the price at which a product or resource sells by changing the amount it sells (or buys).
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| Average revenue | Total revenue from the sale of a product divided by the quantity of the product sold.
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| Total revenue (TR) | The total of number of dollars received by a firm (or firms) from the sale of a product.
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| Marginal revenue | The change in total revenue that results in the sale of 1 additional unit of a firm's product.
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| Break-even point | An output at which a firm makes a normal profit (total revenue=total cost) but not an economic profit.
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| MR = MC rule | The principle that a firm will maximize its profit (or minimize its losses) by producing at the output marginal revenue and marginal cost are equal, provided that product price is equal to or higher than AVC.
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| Short-run supply curve | Shows the quantity of a product a firm in a purely competitive industry will offer to sell at various prices in the short run.
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| Long-run supply curve | Price vs. quantities of a product in the long run.
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| Constant-cost industry | Entry and exit of firms have no effect on prices of the prices firms in the industry must pay for resources and thus no effect on production costs.
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| Increasing-cost industry | Expansion through the entry of new firms raises the prices that firms in the industry must pay for the resources and therefore increases their production costs.
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| Decreasing-cost industry | Expansion through the entry of firms lowers the prices that firms in the industry must pay for the resources and therefore decreases their production cocsts.
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| Productive efficiency | The production of a good in the least costly way.
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| Allocative efficiency | The apportionment of resources among firms and industries to obtain the production of products most wanted by society (consumers).
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| Consumer surplus | The difference between the maximum price a consumer is willing to pay for an additional unit of a product and its market price.
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| Producer surplus | The difference between the actual price a producer receives and the minimum acceptable price.
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| Creative destruction | Hypothesis that the creation of new products and production methods destroys the market power of existing monopolies.
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| Barriers to entry | Anything that artificially prevents firms from entering an industry.
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| Simultaneous consumption | The same-time derivation of utility from some product by a large number of consumers.
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| Network effects | Increases in the value of a product to each user, including existing users, as the total number of users rise.
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| X-inefficiency | The production of output, whatever its level, at a higher average (and total) cost than is necessary for producing that level of output.
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| Rent-seeking behavior | The actions by persons, firms, or unions to gain special benefits from government at the taxpayers' expense or someone else's expense.
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| Price discrimination | The selling of a product to different buyers at different prices when the price differences are not justified by differences in cost.
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| Socially optimal price | The price of a product that results in the most efficient allocation of an economy's resources and that is equal to the marginal cost of a product.
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| Fair-return price | For natural monopolies subject to price regulation, the price that would allow the regulated monopoly to earn a normal profit; a price equal to ATC.
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| Excess capacity | Plant resources that are underused when imperfectly competitive firms produce less output than that associated with achieving minimum average total costs.
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| Mutual interdependence | A change in price strategy (or some other strategy) by one firm will affect the sales and profit of another firms (or firms). Any firm that makes a change can expect its rivals to react to such change.
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| Interindustry competition | The competition for sales between the products of one industry and the products of another industry.
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| Import competition | The competition that domestic firms encounter from the products and services of foreign producers.
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| Game theory | Study of how people behave in strategic situation in which individuals must take into account not only their own possible actions but those of others.
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| Collusion | Firms act together to fix prices, divide a market, or otherwise restrict competition.
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| Kinked-demand curve | A demand curve that has a flatter slope above the current price than below the current price. Applies to a noncollusive oligopoly firm if its rivals will match any price decrease but ignore any price increase.
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| Price war | One firm lowers its price below its rivals', in hopes to increase sales and revenue at its rivals' expense. Price war stops when decreases cease.
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| Cartel | A formal agreement among firms (or countries) in an industry to set the price of a product and establish the outputs of individual firms (or countries) to divide the market for the product geographically.
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| Price leadership | An informal method that firms in an oligopoly may employ to set the price of their product. One firm (leader) is the first to announce a change in price, and the other firms soon announce identical or similar changes.
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