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average fixed cost (AFC)
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fixed cost divided by quantity produced (FC/Q)
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average product
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output per worker
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average total cost (ATC)
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total cost divided by quantity produced (TC/Q)
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average variable cost (AVC)
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variable cost divided by quantity produced (VC/Q)
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economic profit
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(explicit and implicit revenue) - (explicit and implicit cost); a return on entrepreneurship above and beyond normal profits
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firm
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an economic institution that transforms factors of production into goods and services
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fixed costs (FC)
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costs that are spent and cannot be changed in the period of time under consideration
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law of diminishing marginal utility (LDMU)
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the more you consume of a good, the less utility you get out of each additional unit consumed, ceteris paribus
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long-run decision
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a decision in which a firm chooses among all possible production techniques
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marginal costs (MC)
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additional cost over and above the cost already incurred; the increase/decrease in total cost from increasing/decreasing the level of output by one unit
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marginal product
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the additional output that will be forthcoming from an additional worker, other inputs constant
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production
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the transformation of factors into goods and services
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production function
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the relationship between inputs (factors of production) and outputs
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production table
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a table showing the output resulting from various combinations of factors of production or inputs
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profit
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what's left over from total revenues after all the appropriate costs have been subtracted
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short-run decision
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a decision in which the firm is constrained in regard to what production decisions it can make
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total cost (TC)
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the explicit payments to the factors of production plus the opportunity cost of the factors provided by the owners of the firm
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total revenue
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the amount a firm receives for selling its product or service plus any increase in the value of the assets owned by the firm
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variable costs (VC)
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costs that change as output changes
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constant returns to scale
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A situation in which long-run ATCs do not change with an increase in output (Output will rise by the same proportionate increase as all inputs)
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depreciation
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A measure of the decline in the value of an asset over time
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diseconomies of scale
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Situation when the long-run average total costs increase as output increases
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economically efficient
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Achieving a goal at the lowest possible cost
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economies of scale
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Situation when long-run ATCs decrease as output increases
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economies of scope
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Situation when the costs of producing products are interdependent so that it's less costly for a firm to produce a good when it's already producing another
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entrepreneur
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An individual who sees an opportunity to sell an item at a price higher than the average cost of producing it
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individible setup cost
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The cost of an indivisible input for which a certain minimum amount of production must be undertaken before the input becomes economically feasible to use
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learning by doing
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Becoming better at a task the more often you perform it
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minimum efficient level of production
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The amount of production that spreads out setup costs sufficiently for a firm to undertake production profitably
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monitoring costs
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Costs incurred by the organizer of production in seeing to it that the employees do what they're supposed to do
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team spirit
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The feelings of friendship and being part of a team that bring out people's best efforts
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technical efficiency
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A situation in which as few inputs as possible are used to produce a given output
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technological change
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An increase in the range of production techniques that leads to more efficient ways of producing goods as well as the production of new and better goods
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barriers to entry
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Social, political, or economic impediments that prevent firms from entering a market
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marginal cost (mc)
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Additional cost over and above the costs already incurred (Increase in total cost from increasing the level of output by one unit)
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marginal revenue (mr)
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The change in total revenue associated with a change in quantity
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market supply curve
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The horizontal sum of all individual supply curves (Horizontal sum of all the firms' marginal cost curves, taking account of any changes in input prices that might occur)
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normal profit
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The amount the owners of a business would have received in the next-best alternative (Payments to entrepreneurs as the return on their risk taking)
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perfectly competitive market
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A market in which economic
forces operate unimpeded
forces operate unimpeded
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price taker
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A firm or individual who takes the price determined by supply and demand as given
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profit-maximizing condition
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MR = MC = P
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shutdown point
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The point below which the firm will be better off if it temporarily shuts down than it will if it stays in business (where MC intersects AVC)
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first-mover advantage
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Benefits gained from being the first to gain a significant share of a market.
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monopolistic competition
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Market structure in which many firms sell differentiated products; there are few barriers to entry
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monopoly
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A market structure in which one firm makes up the entire market
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natural monopoly
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An industry in which a single firm can produce at a lower cost than can two or more firms (An industry in which significant economies of scale make the existence of more than one firm inefficient)
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network externality
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The phenomenon that the greater use of a product increases the benefit of that product to everyone without them paying for it
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patent
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Exclusive rights over an invention; copyright
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price-discriminate
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To charge different prices to different individuals or groups of individuals
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antitrust policy
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The government's policy toward the competitive process
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cartel
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A combination of firms that acts as if it were a single firm
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cartel model of oligopoly
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A model that assumes that oligopolies act as if they were monopolists that have assigned output quotas to individual member firms of the oligopoly so that total output is consistent with joint profit maximization
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concentration ratio
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The value of sales by the top firms of an industry stated as a percentage of total industry sales
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contestable market model
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A model of oligopoly in which barriers to entry and barriers to exit, not the structure of the market, determine a firm's price and output decisions
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Herfindahl index
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An index of market concentration cal- culated by adding the squared value of the individual market shares of all firms in the industry
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implicit collusion
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A type of collusion in which multiple firms make the same pricing decisions even though they have not explicitly consulted with one another
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judgement by performance
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To judge the competitiveness of markets by the performance (behavior) of firms in that market
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judgement by structure
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To judge the competitiveness of markets by the structure of the industry
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North American Industry Classification System (NAICS)
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An industry classification that categorizes industries by type of economic activity and groups firms with like production processes
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oligopoly
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A market structure in which there are only a few firms and firms explicitly take other firms' likely response into account; there are often significant barriers to entry
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strategic decision making
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Taking explicit account of a rival's expected response to a decision you are making
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Drawing short run cost curves: step 1
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draw atc and avc, with avc lower than atc
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Drawing short run cost curves: step 2
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Draw AFC- declining over time, starting higher than avc
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Drawing short run cost curves: step 3
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Draw MC- hits low points of both avc and afc
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What does AVC tell us?
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Where shutdown point is (MC=AVC)
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What does ATC tell us?
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Where breakeven point is (MC=ATC)
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What does MC tell us?
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Where to produce in order to maximize efficiency (MC=MR)
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Econ solutions to the principal agent problem
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bonuses, commissions, profit sharing, deferred compensation, promotions
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Pareto optimality
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A state of resource allocation where it is impossible to make any one individual better off without making at least one individual worse off
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Conditions of perfect competition
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Lots of buyers and sellers, each seller faces a very elastic demand curve, no entry or exit barriers, symmetrically informed buyers and sellers, product homogeneity
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Pareto optimal position
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A position from which no person can be made better off without another person being made worse off
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Optimal firm size
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minimizes atc- this is the lowest point on the LRAC, where the firm is experiencing constant returns to scale
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Why is marginal revenue less than demand curve? (in markets that are not perfectly competitive)
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when a producer has to lower his price to sell more of an item, marginal revenue is less than price.
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What does increase pricing control do to elasticity?
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Decreases elasticity, because there is a lack of substitutes
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