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Firm
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o An entity that produces and sells goods, with the goal of maximizing its profit.
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Marginal Benefit
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o The additional benefit gained from the last unit of an activity.
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Marginal Cost
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o The additional cost associated with the last unit of an activity.
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Equimarginal Principle
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o The principle that an activity should be pursued to the point where marginal cost equals marginal benefit.
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Revenue
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o The proceeds collected by a firm when it sells its products.
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Total Revenue
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o The same thing as "revenue." It can be computed by the formula Revenue = Price X Quantity
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Marginal Revenue
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o The additional revenue earned from the last item produced and sold.
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Fixed Costs
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o Costs that don't vary with the quantity of output.
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Variable Costs
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o Costs that vary with the quantity of output.
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Increasing Marginal Cost
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o The condition where each additional unit of activity is more expensive than the last.
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Sunk Cost
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o A cost that can no longer be avoided.
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Total Product
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o The quantity of output produced by the firm in a given amount of time. Total product depends on the quantity of labor the firm hires.
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Short-Run Production Function
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o The function that associates to each quantity of labor its total product.
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Marginal Product of Labor
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o The increase in total product due to hiring one additional worker (assuming that capital is held fixed).
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Average Product of Labor
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o Total product divided by the number of workers.
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Point of Diminishing Marginal Returns
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o The point after which the marginal product curve begins to decrease.
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Wage Rate
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The price of hiring labor.
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Capital
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Physical assets used as factors of production.
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Average Variable Cost
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Variable cost divided by the quantity output.
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Average Cost (Average Total Cost)
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Total cost divided by the quantity output.
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Technologically Inefficient
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o A production process that uses more inputs than necessary to produce a given output.
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Unit Isoquant
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o The set of all technically efficient ways to produce 1 unit of output.
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Marginal Rate of Technical Substitution of Labor for Capital
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o The amount of capital that can be substituted for 1 unit of labor, holding output constant.
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Production Function
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o The rule for determining how much output can be produced with a given basket of inputs.
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Isocost
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o The set of all baskets of inputs that can be employed at a given cost.
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Expansion Path
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o The set of tangencies between isoquants and isocosts.
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Long-run Total Cost
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o The cost of producing a given amount of output when the firm is able to operate on its expansion path.
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Long-run Average Cost
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Long-run total cost divided by quantity.
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Long-run Marginal Cost
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o The part of long-run total cost attributable to the last unit produced.
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Increasing Returns to Scale
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o A condition where increasing all input levels by the same proportion leads to a more than proportionate increase in output.
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Constant Returns to Scale
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o A condition where increasing all input levels by the same proportion leads to a proportionate increase in output.
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Decreasing Returns to Scale
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o A condition where increasing all input levels by the same proportion leads to a less than proportionate increase in output.
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Perfectly Competitive Firm
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o One that can sell any quantity it want to at some going market price.
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Shutdown
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o A firm's decision to stop producing output. Firms that shut down continue to incur fixed costs.
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Exit
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o A firm's decision to leave the industry entirely. Firms that exit no longer incur any costs.
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Elasticity of Supply
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o The percentage change in quantity supplied resulting from a 1% increase in price.
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Competitive Industry
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o An industry in which all firms are competitive.
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Accounting Profit
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o Total revenue minus those costs than an accountant would consider.
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Economic Profit
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o Total revenue minus all costs, including the opportunity cost of being in another industry.
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Constant-cost Industry
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o A competitive industry in which all firms have identical cost curves, and those cost curves do not change as the industry expands or contracts.
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Increasing-cost Industry
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A competitive industry where the break-even price for new entrants increases as the industry expands.
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Decreasing-cost Industry
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o A competitive industry where the break-even price for new entrants falls as the industry expands.
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Market Power or Monopoly Power
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o The ability of a firm to affect market prices through its actions. A firm has monopoly power if and only if it faces a downward-sloping demand curve.
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Lerner Index
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o The excess of price over marginal cost, expressed as a fraction of the price.
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Natural Monopoly
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o An industry in which each firm's average cost curve is decreasing at the point where it crosses market demand.
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Economies of Scope
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o Efficiencies resulting from producing multiple products at a single firm.
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Price Discrimination
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Changing different prices for identical items.
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First-degree Price Discrimination
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o Charging each customer the most that he would be willing to pay for each item that he buys.
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Second-degree Price Discrimination
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Charging the same customer different prices for identical items.
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Third-degree Price Discrimination
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Charging different prices in different markets
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Versioning
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Offering an inferior product to facilitate price discrimination.
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Two-part Tariff
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An entry fee that allows you to purchase goods or services.
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