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Price elasticity of demand
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The responsiveness of the quantity demanded to a change in price, measured by dividing the percentage change in quantity demanded of a product by percentage change in a products price
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elastic demand
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The case where the percentage change in quantity demanded is greater than the percentage change in price so the price elasticity is greater than 1 in absolute value
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inelastic demand
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The case where the percentage change in quantity demanded is less than the percentage change in price, so the price elasticity is less than 1 in absolute value
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unit-elastic demand
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The case where the percentage change in quantity demanded is equal to the percentage change in price, so the price elasticity is equal to one in absolute value
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perfectly inelastic demand
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the case where the quantity demanded is completely unresponsive to price and the price elasticity of demand equals zero
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perfectly elastic demand
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the case where the quantity demanded is infinitely responsive to price and the price elasticity of demand equals infinity
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total revenue
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The total amount of funds a seller receives from selling a good or service, calculated by multiplying price per unit by the number of units sold.
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Technology
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The process a firm uses to turn inputs into outputs of goods and services
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technological change
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a positive or negative change in the ability of a firm to produce a given level of output with a given quantity of inputs
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short run
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the period of time during which at least one of a firm's inputs is fixed
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long run
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the period of time in which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of its physical plant
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total cost
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the cost of all inputs a firm uses in production
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variable cost
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Costs that change as output changes
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fixed costs
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Costs that remain constant as output changes
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opportunity cost
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The highest-valued alternatitive that must be given up to engage in an activity
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explicit cost
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a cost that involves spending money
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implicit cost
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a non-monetary opportunity cost
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production function
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the relationship between the inputs employed by a firm and the maximum output it can produce with those inputs
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average total cost
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total cost divided by the quantity of output produced
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marginal product of labor
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the additional output a firm produces as a result of hiring one more worker
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law of diminishing returns
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the principle that, at some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline
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average product of labor
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the total output produced by a firm divided by the quantity of workers
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marginal cost
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the cost of producing one more unit of a good
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average fixed cost
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fixed cost divided by the quantity of output produced
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average variable cost
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variable cost divided by the quantity of output produced
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long-run average cost curve
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a curve that shows the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed
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economies of scale
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The situation in which a firms long run average cost falls as it increases the quanitty of output it produces
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constant returns to scale
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the situation in which a firm's long-run average costs remain unchanged as it increases output
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minimum efficient scale
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the level of output at which all economies of scale are exhausted
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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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perfectly competitive market
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A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market.
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price taker
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a buyer or seller who cannot affect the market price
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profit
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total revenue minus total cost
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average revenue
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total revenue divided by the quantity sold
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marginal revenue
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the change in total revenue from an additional unit sold
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sunk cost
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a cost that has already been paid and cannot be recovered
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shutdown point
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the minimum point on a firm's average variable cost curve; if the price falls below this point, the firm shuts down production in the short run
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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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economic loss
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the situation in which a firm's total revenue is less than its total cost, including all implicit costs
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long-run competitive equilibrium
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the situation in which the entry and exit of firms has resulted in the typical firm breaking even
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long-run supply curve
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a curve that shows the relationship in the long run between market price and the quantity supplied
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productive efficiency
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a situation in which a good or service is produced at the lowest possible cost
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allocative efficiency
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A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it
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monopoly
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A firm that is the only seller of a good or service for which there is not a close substitute
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patent
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The exclusive legal right to produce a product for a period of 20 years from the date the patent application is filed
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copyright
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A government granted exclusive right to produce and sell a creation
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public franchise
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a government designation that a firm is the only legal provider of a good or service
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network externality
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a situation in which the usefulness of a product increases with the number of consumers who use it
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natural monopoly
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A situation in which economies of scale are so large that one firm can supply the entire market at a lower average total cost than can two or more firms
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market power
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The ability of a firm to change a price greater than marginal cost
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price discrimination
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The practice of charging different prices to different customers for the same good or service when the price differences are not due to differences in cost
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collusion
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An agreement among firms to charge the same price or otherwise not to compete
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antitrust laws
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laws aimed at eliminating collusion and promoting competition among firms
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horizontal merger
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A merger between firms in the same industry
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vertical merger
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A merger between firms at different stages in the production of a good
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