Microeconomics Chapter 7 Vocab

question

Explicit Cost

answer

Opportunity cost of resources employed by a firm that takes the form of cash payments

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Implicit Cost

answer

A firm's opportunity cost of using its resources or those provided by its owners without a corresponding cash payment

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Accounting Profit

answer

A firm's total revenue minus its explicit costs

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Economic Profit

answer

A firm's total revenue minus its explicit and implicit costs

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Normal Profit

answer

The accounting profit earned when all resources earn their opportunity cost

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Variable Resources

answer

Any resource that can be varied in the short run to increase or decrease production

question

Fixed Resource

answer

Any resource that cannot be varied in the short run

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Short Run

answer

A period during which at least one of a firm's resources is fixed (usually 3 months)

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Long Run

answer

A period during which all resources under the firm's control are variable

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Total Product

answer

The total output produced by a firm

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Production Function

answer

The relationship between the amount of resources employed and a firm's total product

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Increasing Marginal Returns

answer

The marginal product of a variable resource increases as each additional unit of that resource is employed

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Marginal Product

answer

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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Law of Diminishing Marginal Returns

answer

As more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative

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Fixed Cost

answer

Any production cost that is independent of the firm's rate of output

question

Variable Cost

answer

Any production cost that changes as the rate of output changes

question

Total Cost

answer

The sum of fixed cost and variable cost: FC + VC

question

Average Variable Cost

answer

Variable cost divided by output: = VC/q

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Average Total Cost

answer

the sum of average fixed cost and average variable cost: = AFC + AVC

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Long-Run Average Cost Curve

answer

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

question

Economies of Scale

answer

Forces that reduce a firm's average cost as the scale of operation increases in the long run

question

Diseconomies of Scale

answer

Forces that may eventually increase a firm's average cost as the scale of operation increases in the long run

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Constant Long-Run Average Cost

answer

A cost that occurs when, over some range of output, long run average cost neither increases nor decreases with changes in firm size

question

Production Function

answer

Identifies the maximum quantities of a particular good or service that can be produced per time period with various combinations of resources, for a given level of technology.

question

Isoquant Curve

answer

A curve that shows all the technologically efficient combinations of two resources, such as labor and capital, that produce a certain rate of output

question

Marginal Rate of Technological Substitution (MRTS)

answer

The rate at which labor substitutes for capital without affecting output

question

Isocost Line

answer

Identifies all combinations of capital and labor the firm can hire for a given total cost

question

Expansion Path

answer

The line formed by connecting tangency points (page 164)

question

Market Structure

answer

Important features of a market, such as the number of firms, product uniformity across firms, firms' ease of entry and exit, and forms of competition

question

Perfect Competition

answer

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

question

Commodity

answer

A standardized product, a product that does not differ across producers, such as bushels of wheat or an ounce of gold

question

Price Taker

answer

A firm that faces a given market price and whose quantity supplied has no effect on that price; a perfectly competitive firm

question

Marginal Revenue

answer

The change in total revenue from selling an additional unit; in perfect competition, it is also market price.

question

Golden Rule of Profit Maximization

answer

To maximize profit or minimize loss, a firm should produce the quantity at which marginal revenue equals marginal cost; holds for all market structures

question

Average Revenue

answer

Total revenue divided by output, or =TR/q; in all market structures, it should equal the market price

question

Short-Run Firm Supply Curve

answer

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

question

Short-Run Industry Supply Curve

answer

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

question

Long-Run Industry Supply Curve

answer

A curve that shows the relationship between price and quantity supplied by the industry once firms adjust fully to any change in market demand

question

Constant-Cost Industry

answer

An industry that can expand or contract without affecting the long run per-unit cost of production; the long-run industry supply curve is horizontal

question

Increasing-Cost Industry

answer

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

question

Producer Efficiency

answer

The condition that exists when market output is produced using the least-cost combination of inputs; minimum average cost in the long run

question

Allocative Efficiency

answer

The condition that exists when firms produce the output most preferred by consumers; marginal benefit equals marginal cost

question

Producer Surplus

answer

A bonus for producers in the short run; the amount by which total revenue from production exceeds variable costs

question

Social Welfare

answer

The overall well-being of people in economy; maximized when the marginal cost of production equals the marginal benefit to consumers

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question

Explicit Cost

answer

Opportunity cost of resources employed by a firm that takes the form of cash payments

question

Implicit Cost

answer

A firm's opportunity cost of using its resources or those provided by its owners without a corresponding cash payment

question

Accounting Profit

answer

A firm's total revenue minus its explicit costs

question

Economic Profit

answer

A firm's total revenue minus its explicit and implicit costs

question

Normal Profit

answer

The accounting profit earned when all resources earn their opportunity cost

question

Variable Resources

answer

Any resource that can be varied in the short run to increase or decrease production

question

Fixed Resource

answer

Any resource that cannot be varied in the short run

question

Short Run

answer

A period during which at least one of a firm's resources is fixed (usually 3 months)

question

Long Run

answer

A period during which all resources under the firm's control are variable

question

Total Product

answer

The total output produced by a firm

question

Production Function

answer

The relationship between the amount of resources employed and a firm's total product

question

Increasing Marginal Returns

answer

The marginal product of a variable resource increases as each additional unit of that resource is employed

question

Marginal Product

answer

The change in total product that occurs when the use of a particular resource increases by one unit, all other resources constant

question

Law of Diminishing Marginal Returns

answer

As more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative

question

Fixed Cost

answer

Any production cost that is independent of the firm's rate of output

question

Variable Cost

answer

Any production cost that changes as the rate of output changes

question

Total Cost

answer

The sum of fixed cost and variable cost: FC + VC

question

Average Variable Cost

answer

Variable cost divided by output: = VC/q

question

Average Total Cost

answer

the sum of average fixed cost and average variable cost: = AFC + AVC

question

Long-Run Average Cost Curve

answer

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

question

Economies of Scale

answer

Forces that reduce a firm's average cost as the scale of operation increases in the long run

question

Diseconomies of Scale

answer

Forces that may eventually increase a firm's average cost as the scale of operation increases in the long run

question

Constant Long-Run Average Cost

answer

A cost that occurs when, over some range of output, long run average cost neither increases nor decreases with changes in firm size

question

Production Function

answer

Identifies the maximum quantities of a particular good or service that can be produced per time period with various combinations of resources, for a given level of technology.

question

Isoquant Curve

answer

A curve that shows all the technologically efficient combinations of two resources, such as labor and capital, that produce a certain rate of output

question

Marginal Rate of Technological Substitution (MRTS)

answer

The rate at which labor substitutes for capital without affecting output

question

Isocost Line

answer

Identifies all combinations of capital and labor the firm can hire for a given total cost

question

Expansion Path

answer

The line formed by connecting tangency points (page 164)

question

Market Structure

answer

Important features of a market, such as the number of firms, product uniformity across firms, firms' ease of entry and exit, and forms of competition

question

Perfect Competition

answer

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

question

Commodity

answer

A standardized product, a product that does not differ across producers, such as bushels of wheat or an ounce of gold

question

Price Taker

answer

A firm that faces a given market price and whose quantity supplied has no effect on that price; a perfectly competitive firm

question

Marginal Revenue

answer

The change in total revenue from selling an additional unit; in perfect competition, it is also market price.

question

Golden Rule of Profit Maximization

answer

To maximize profit or minimize loss, a firm should produce the quantity at which marginal revenue equals marginal cost; holds for all market structures

question

Average Revenue

answer

Total revenue divided by output, or =TR/q; in all market structures, it should equal the market price

question

Short-Run Firm Supply Curve

answer

question

Short-Run Industry Supply Curve

answer

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

question

Long-Run Industry Supply Curve

answer

A curve that shows the relationship between price and quantity supplied by the industry once firms adjust fully to any change in market demand

question

Constant-Cost Industry

answer

An industry that can expand or contract without affecting the long run per-unit cost of production; the long-run industry supply curve is horizontal

question

Increasing-Cost Industry

answer

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

question

Producer Efficiency

answer

The condition that exists when market output is produced using the least-cost combination of inputs; minimum average cost in the long run

question

Allocative Efficiency

answer

The condition that exists when firms produce the output most preferred by consumers; marginal benefit equals marginal cost

question

Producer Surplus

answer

A bonus for producers in the short run; the amount by which total revenue from production exceeds variable costs

question

Social Welfare

answer

The overall well-being of people in economy; maximized when the marginal cost of production equals the marginal benefit to consumers

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