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average cost
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the total cost divided by the total product
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average product
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the average amount produced by each unit of a variable factor of production
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factors of production
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Land, labor, and capital; the three groups of resources that are used to make all goods and services
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Law of Diminishing Marginal Returns
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The marginal product of an input will eventually decrease as more of that input is used. The law of diminishing marginal returns assumes that all other inputs remain constant.
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long run
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the time period in which all inputs can be changed
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marginal cost
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The change in total costs that results from increasing total product by one unit (ΔTC/ΔQ).
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marginal product
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The increase in output from using one more unit of an input while all other inputs are constant (ΔTP/ΔL).
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production function
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A function showing the maximum output for each specific combination of inputs, given technology.
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short run
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the period of time during which at least one of a firm's inputs cannot be changed
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technological change
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A shift in the production function, usually in the direction of a greater quantity of output at each level of input. Technological change may be the result of creation of new products, redesign of old products, or the creation of new methods of manufacturing.
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total cost
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fixed costs plus variable costs
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total fixed cost
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The costs (prices multiplied by the amounts of inputs) of the inputs that are fixed. This is also the amount of cost when total product is zero. Total fixed costs are costs that do not vary as output changes
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total product
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the total amount of output produced
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total variable cost
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the cost of the firm's variable factor of production - the cost of labor
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average variable cost
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Total variable costs divided by total output. Same as average total cost or average cost in the long-run, when all costs are variable.
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constant returns to scale
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Long-run average total cost remains constant as the quantity of output increases.
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diseconomies of scale
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the situation in which a firm's long-run average costs rise as the firm increases output
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econimies of scale
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Long-run average total cost decreases as the quantity of output increases.
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marginal analysis
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analysis that involves comparing marginal benefits and marginal costs
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marginal product of labor
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the change in output from hiring one additional unit of labor
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Marginal product of capital
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The change in total output that results from the firm hiring one more unit of capital.
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total costs
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All costs of producing a specific amount of output.
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total product
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total output produced by the firm
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total revenue
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the total amount of money a firm receives by selling goods or services
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variable costs
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costs that vary with the quantity of output produced
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accounting profit
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total revenue minus total explicit cost
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average revenue
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total revenue divided by the quantity sold
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economic profits
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total revenues divided by the quantity sold
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entry barrier
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Any impediment that makes entry into a market difficult or impossible for new firms.
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Firm Supply
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A firm's quantity supplied at each price level.
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long-run market supply
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The quantity supplied at each price, after firms are given time to vary all inputs and to enter and exit the industry
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marginal revenue
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the additional income from selling one more unit of a good; sometimes equal to price
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market supply
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the sum of all that is supplied each period by all producers of a single product
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perfectly competitive market
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A market with many buyers and sellers, with each seller offering the same good or service. Consumers and producers are aware of quality of inputs and goods and prices. Firms can easily enter and exit the industry
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price taker
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A firm "takes" the price that is given it by the market supply and demand conditions. The firm can do nothing to change that price.
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total revenue
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The number of goods sold multiplied by the price at which they are sold.
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barriers to entry
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factors that make it difficult and costly for an organization to enter a particular task environment or industry
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Monopoly
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A market in which there are many buyers but only one seller.
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natural monopoly
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A firm that can produce at a lower average cost per unit of output than a number of smaller firms producing a similar amount of total output
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price discrimination
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A producer charges different prices for different units of output of the same product for reasons other than differences in costs.
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Cartel
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A group of producers agreeing to act in concert with one another
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monoploistic competition
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An industry with many competitors, all producing slightly different products.
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Oligopoly
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An industry with few producers, high entry barriers, and each one has market power. They compete on either price or quantity and may charge the same or different prices
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payoff matrix
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A payoff matrix is usually a two-by-two table with two actors or players. Each player will have a set of actions that will result in different payoffs. Each player's payoff is dependent on both players' course of action.
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antitrust law
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Legislation that restricts deliberate formation of monopolies and prevents firms from engaging in anticompetitive practices.
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average cost pricing
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A price, set by a regulator of a natural monopoly, equal to average cost at the corresponding quantity demanded.
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concentration ratio
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A four-firm concentration ratio is the percentage of industry sales sold by the four largest firms in the industry. Other similar measures, that indicate the degree of market power and competitiveness, are often used.
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Marginal cost pricing
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A price, set by a regulator of a natural monopoly, equal to marginal cost at the corresponding quantity demanded.
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predatory pricing
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A firm that lowers prices with the purpose of driving competitors out of a market, increasing its own market power, and eventually reducing output and raising prices is engaging in predatory pricing
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