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Total Utility
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The total satisfaction a consumer derives from consumption; it could refer to either the total utility of consuming a particular good or the total utility from all consumption.
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Marginal Utility
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The change in total utility derived from a one-unit change in consumption of a good.
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Law of Diminishing Marginal Utility
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The more of a good a person consumes per period, the smaller the increase in total utility from consuming one more unit (o.t.c.)
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Consumer Equilibrium
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The condition in which an individual consumer's budget is spent and the last dollar spent on each good yields the same marginal utility; therefore, utility is maximized.
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Marginal Valuation
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the dollar value of the marginal utility derived from consuming each additional unit of a good
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Consumer Surplus
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The difference between the maximum amount a person is willing to pay for a given quantity of a good and what the consumer actually pays.
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indifference curve
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Combinations of goods reflect the same total utility; slopes downward to right; convex to origin.
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Explicit Cost
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opportunity cost of resources employed by a firm that takes the form of cash payments
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Implicit Cost
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A firm's opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment
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Economic Profit
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a firm's total revenue minus its explicit and implicit costs
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Normal Profit
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the accounting profit earned when all resources earn their opportunity cost
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short run
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the period of time (under 1 year) during which at least one of a firm's inputs is fixed
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long run
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period of time (under 1 year) during which all resources under a firms control are variable
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total product
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total output produced by the firm
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marginal product
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the change in total product that occurs when the use of a particular resource increases by one unit, all other resources constant
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increasing marginal returns
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the marginal product of a variable resource increases as each additional unit of that resource is employed
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fixed cost
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any production cost that is independent of the firm's rate of output
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variable cost
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any production cost that changes as the rate of output changes
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total cost
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sum of fixed cost and variable cost
TC = FC + VC
TC = FC + VC
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long-run average cost curve
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a curve that indicates the lowest average cost of production at each rate of output when the size, or scale, of the firm varies; also called the planning curve
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economics of scale
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Forces that reduce a firm's average cost as the scale of operation increases in the long run
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diseconomies of scale
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forces that make eventually increase a firms average cost as the scale of operation increases in the long run
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Isoquant Curve
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A curve that shows all the technologically efficient combinations of two resources, such as labor and capital, that produce a certain rate of output.
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Properties of Isoquants
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1. isoquants farther from the origin represent greater output rates
2. isoquants have negative slopes because along a given isoquant, the quantity of labor employed inversely relates to the quantity of capital employed
3. isoquants do not intersect because each isoquant refers to a specific rate of output
4. isoquants are usually convex to the origin
2. isoquants have negative slopes because along a given isoquant, the quantity of labor employed inversely relates to the quantity of capital employed
3. isoquants do not intersect because each isoquant refers to a specific rate of output
4. isoquants are usually convex to the origin
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Market Structure
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Important features of a market, such as the number of firms, product uniformity across firms, firms' ease of entry and exit, and forms of compensation.
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Perfect Competition
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A market structure with many fully informed buyers and sellers of a standardized product and no obstacles to entry or exit of firms in the long run.
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Price taker
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A firm that faces a given market price and whose quantity supplied has no effect on that price; a perfectly competitive term.
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Marginal revenue
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The change in total revenue from selling an additional unit; in perfect competition, marginal revenue is also the market price.
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Average revenue
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total revenue divided by output, or AR=TR/q; in all market structures, average revenue equals the market price
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Short-Run Firm Supply Curve
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a curve that shows the quantity a firm supplies at each price in the short run; in perfect competition, that portion of a firm's marginal cost curve that intersects and rises above the low point on its average variable cost curve
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short-run industry supply curve
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a curve that indicates the quantity supplied by the industry at each price in the short run; in perfect competition, the horizontal sum of each firm's short-run supply curve
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long-run industry supply curve
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a curve that shows the relationship between price and quantity supplied by the industry once firms adjust fully to any change in market demand
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Increasing-cost industry
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an industry that faces higher per-unit production costs as industry output expands in the long run; the long run industry supply curve slopes upward
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Allocative efficiency
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the condition that exists when firms produce the output most preferred by consumers; marginal benefit equals marginal cost (for consumer)
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Monopoly
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sole supplier of a product with no close substitutes
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Barrier to Entry
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any impediment that prevents new firms from entering an industry and competing on an equal basis with existing firms
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Patent
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A legal barrier to entry that grants its holder the exclusive right to sell a product for 20 years from the date the patent application is filed (ex: pharmaceuticals)
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Economics of scale
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sometimes a monopoly occurs when a firm experiences economies of scale, as reflected by a downward sloping, long run average cost curve.
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Price Maker
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A firm must find the profit maximizing price when the demand curve for its output slopes downward
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Rent seeking
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Activities undertaken by individuals or firms to influence public policy in a way that will increase their incomes
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Price Discrimination
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Increasing profit by charging different groups of consumers' different prices when the price differences are not justified by differences in costs
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Monopolistic Competition
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a market structure with many firms selling products that are substitutes but different enough tat each firms demand curve slopes downward; firm entry is relatively easy.
- these types of firms are price makers
- barriers to entry are low
- but there are enough sellers that they behave competitively
- they can after independently or interdependently
- these types of firms are price makers
- barriers to entry are low
- but there are enough sellers that they behave competitively
- they can after independently or interdependently
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Product differentiation
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Products differentiate themselves in four basic ways:
Physical differences (color, weight),
Location (spatial differences, price/convenience), Services (free delivery, guarantees), and
Product Image (endorsements, all natural, environmentally friendly).
Physical differences (color, weight),
Location (spatial differences, price/convenience), Services (free delivery, guarantees), and
Product Image (endorsements, all natural, environmentally friendly).
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Excess Capacity
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the difference between a firm's profit-maximizing quantity and the quantity that minimizes average cost (in monopolistic competition, firms fall short of producing the quantity that would achieve the lowest average cost... as opposed to perfect competition).
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oligopoly
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a market structure characterized by a few firms whose behavior is interdependent
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Cartel
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Group of firms that agree to coordinate their production and pricing decision to reap monopoly profits; illegal in the US
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Price leader
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Price leader sets the price for the industry and everybody else follows
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