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Short run
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The period of time in which at least one factor of production is fixed in size. All production takes place in the short run.
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Long run
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The period of time in which all factors of production are variable. All planning takes place in the long run.
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Total product
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The total output that a firm produces, using its fixed and variable factors in a given period of time.
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Average product
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The output that is produced, on average, by each unit of the variable factor.
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Marginal product
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The extra output that is produced by using an extra unit of the variable factor.
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Law of diminishing returns
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The increased output per additional unit of variable input will ultimately fall. These diminishing returns will always set in if one or more factors of production are fixed.
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Law of diminishing average returns
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As extra units of a variable factor are applied to a fixed factor, the output per unit of the variable factor (AP) will eventually diminish.
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Law of diminishing marginal returns
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As extra units of a variable factor are applied to a fixed factor, the output from each extra unit of the variable factor (MP) will eventually diminish.
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Economic costs
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Economic costs are estimated by adding explicit costs (accounting costs) and implicit costs (the opportunity cost of using factors of production). Economic cost = accounting cost + opportunity cost.
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Explicit costs
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Costs to a firm that involve the direct payment of money to purchase factors not already owned by the firm.
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Implicit costs
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Earnings that a firm could have had if it had employed its factors in another use or hired out or sold them to another firm.
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Fixed costs
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Costs that do not change with the level of output. They are incurred whether the firm produces or not, and will thus be the same for one or any other number of units.
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Variable costs
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Costs that vary with the level of output. Variable costs increase as more of the variable factor is used.
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Total costs
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The total costs of producing a certain level of output, i.e. fixed costs plus variable costs.
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Average cost
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It is the average (total) cost of production per unit, calculated by dividing the total cost by the quantity produced. It is equal to the average variable cost plus the average fixed cost.
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Marginal cost
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It is the additional cost of producing one more unit of output.
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Increasing returns to scale
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Experienced when long-run unit costs are falling as output increases, meaning a given percentage increase in factors of production leads to a greater percentage increase in output, thus reducing long-run average costs.
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Constant returns to scale
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Experienced when long-run unit costs are constant as output increases, meaning a given percentage increase in factors of production leads to the same percentage increase in output, thus leaving long-run average costs the same.
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Decreasing returns to scale
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Experienced when long-run unit costs are rising as output increases, meaning a given percentage increase in factors of production leads to a smaller percentage increase in output, thus increasing long-run average costs.
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Economies of scale
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They are a fall in long run average costs that come about when a firm alters its factors of production in order to increase its scale of output, and lead to the firm experiencing increasing returns to scale.
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Diseconomies of scale
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They are an increase in long run average costs that come about when a firm alters its factors of production in order to increase its scale of output, and lead to the firm experiencing decreasing returns to scale.
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Total revenue
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The total amount of money that a firm receives from the sale of a particular quantity of output in a given time period. TR = p x q.
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Average revenue
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Total revenue received divided by the number of units sold. Usually, price is equal to average revenue.
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Marginal revenue
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The extra revenue gained from selling one more unit of a good or service in a given time period.
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Normal profit/Zero economic profit
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The amount of revenue needed to exactly cover all of the economic costs. It is the minimum amount of revenue needed to keep the firm in business.
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Economic profit/Abnormal profit
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A level of profit that is greater than that required to ensure that a firm will continue to supply its existing product. This occurs when total revenue is greater than economic costs.
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Shut-down price
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The price that enables a firm to cover its variable costs in the short-run, and occurs where price equals average variable costs. If price does not cover average variable costs, the firm will shut down in the short run.
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Break-even price
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The price that enables a firm to cover all of its costs in the long run, and occurs where price equals average total costs. If price does not cover average total costs in the long run, the firm will shut down for good.
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Profit-maximizing level of output
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The level of output where marginal revenue is equal to marginal cost, and the marginal cost curve is rising.
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Satisficing - Refers to the acceptance of less than maximum profits in order to pursue other objectives.
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Productive efficiency
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Exists when goods are produced at the lowest possible cost per unit of output. This is achieved at the point where average total cost is at its lowest value, that is, where MC=AC.
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Allocative efficiency
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Occurs where suppliers are producing the optimal mix of goods and services required by consumers. In this scenario, the firm sells the last unit it produces at the amount that it cost to make it. It is the level of output where MC=AR.
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Perfect competition
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A market structure where there are a very large number of small firms, producing identical products. No individual firm is capable of affecting the market supply curve and thus cannot affect the market price. Because of this, the firms are price takers. There are no barriers to entry or exit and all the firms have perfect knowledge of the market.
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Monopoly
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A market form where there is only one firm supplying the market, so the firm is the industry. Monopolies usually have high barriers to entry, enabling them to make abnormal profits in the long run.
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Barriers to entry
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Obstacles in the way of potential newcomers to a market, such as economies of scale, brand loyalty, and legal protection.
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Natural monopoly
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A natural monopoly is said to exist if the market size in relation to the available production technology is such that two firms cannot profitably exist. There are only enough economies of scale available in a market to support one firm.
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Monopolistic Competition
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A market structure where there are many sellers producing differentiated products, with no barriers to entry or exit.
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Product differentiation
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A form of non-price competition where suppliers attempt to make their products different (or perceived to be different) from those of their competitors. Examples include differences in quality, performance, design, styling, or packaging.
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Concentration ratio
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Concentration ratios measure the proportion of total market share controlled by a given number of firms. A high concentration ratio in an industry tends to identify the industry as an oligopoly.
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Oligopoly
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A market structure where there are a few large firms that dominate the market. A key feature is that of interdependence between firms, and there tends to be price rigidity.
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Cartel
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A group of firms in an industry that join together to limit competition between member firms, fix prices, and maximize joint profits as if the firms were collectively a monopoly. These are usually illegal in most countries.
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Non-collusive oligopoly
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Where firms in an oligopoly do not resort to agreements to fix prices or output. Competition tends to be non-price and prices tend to be stable, with firms developing strategies that take into account all possible reactions of their rivals when making pricing decisions.
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Price discrimination
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Price discrimination occurs when a producer charges a different price to different customers for an identical good or service, according to the willingness/ability of different consumers to pay for it. The price difference is not justified by differences in cost.
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