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Perfect Competition
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The decisions of individual buyers and sellers have no effect on prices. The firm is a price maker. An Industry where many small firms produce a nearly identical product.
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Perfectly Elastic
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The demand curve for a perfectly competitive market is a horizontal line.
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Unitary Elastic
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A price change leads to no change in the demand for the product
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Perfectly Inelastic
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When the price changes and there is no change in demand
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Elasticity of Demand
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Responsiveness of demand to a change in a product price
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Elastic Demand
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A one percent change in price leads to a greater than one percent change in demand. In elastic demand, when price is reduced, total revenues rise. The larger the number of substitutes, the greater the elasticity.
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Inelastic Demand
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A one percent change in price leads to a less than one percent change in demand.
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Total coST
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is fixed cost plus variable cost.
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Fixed Costs
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are costs that must be paid whether or not a product is produced; loans, capital equipment, utilities, salaries of seniot management and staff. Also called operating costs. *Fixed costs do not vary with output*
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Variable costs
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vary with changes in inputs. In the long run all costs are variable costs.
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Total Revenue
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Quantity times price (Q x P)
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Marginal Product
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Producing one more unit. The change in total production associated with producing one more unit.
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Marginal Cost
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The increase in total costs prom producing one more unit.
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Profits
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are the difference between total cost and price. They are the rewards for innovation and risk taking by true entrepreneurs. are a signal to producers that they are meeting consumers needs*
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Short-Run Breakeven (TR=TC)
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The point at which a firm earns normal or accounting profits. *When total revenues equal total costs there are accounting profits only*
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Economic Profits
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MR=MC: Mariginal Revenue at its highest, marginal cost at its lowest. TR minus implicit costs. A profit in excess of accounting profits is called accounting profits. Economic Profits are above accounting profits and include accounting profits.* It is possible for a single firm to make economic profits while the industry cannot. *** IF MR and MC come together above the average total cost curve, pure economic profits are maximized.
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Profit Maximization --(MR=MC)
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Marginal revenues are at highest point, marginal costs at lowest point. All firms seek to maximize profits. A profit maximizing firm will choose the technology that minimizes cost. In a competitive market, all firms seek to maximize profits.
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Least combination of resources
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All firms seek to maximize profits by using the combination of labor and technology that minimizes costs.
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Revenue Maximization (TR>TC)
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break even occurs at the long run, second breakeven; accounting profits occur both at the short-run and the long run breakeven.
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Marginal Revenue
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Increase in Total Revenues from adding one more unit of a product
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Functions of price
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Price organizes the market, rations scarce goods, steers resources to their most efficient or profitable use.
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Economies of scale
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Implies that as one unit of input is added, output increases by more than one unit. Increased production leads to a lower average costs per unit. *are a result of increased specialization.
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Dis-Economies of Scale
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are a result of problems with coordination and communication in large firms and poor management. Increase in inputs leads to higher unit per cost. One unit in, less than one unit out.
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Constant Return to Scale
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One unit IN, one unit OUT. If input doubles, output doubles.
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Natural Monopoly
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A monopoly that can take advantage of decreasing average costs. Where a single firm can produce all of the industrys output at a lower per-unit cost than other firms.
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Monopoly & Monopolist
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The supplier of a good or service for which there is no close substitue. In a monopoly prices tend to be inelastic. A monopolist does not always earn a profit.
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Government Barriers And Monopoly
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In order for a monopoly to exsist, there must be barriers.
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Patients, Copyrights and Trademarks
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The barriers that prevent competition and protect a monopoly. Government sanctioned monopolies.
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Monopoly Demand Curve and Profits
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Demand curve is the market curve. Monopolies do not always earn a profit. Monopolies seek to maximize profits, not meet the full demand of consumers.
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Price Searcher-Trial and error
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Monopoly firms use trial and error to find the price that maximizes profit. They are price searchers.
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Price Taker
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Firms in a perfectly competitive market
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Monopolistic competition
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Each firm holds a relatively small market share. In a monopolistic competition there tends to be zero economic profits. They are price takers. **A market where there are a large number of firms that produce similar but not identical products.
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Kinked Demand cURVE
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An analysis used to explain why price changes are infrequent in an oligopoly.** In kinked demand theory, price tends to be inflexible.
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Cartel/Collusion
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A cartel is an association of producers who agree to set common prices and restrict output. **Collusion among oligopolist is difficult because of demand and cost differences.
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Oligopoly/Oligopolists
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An oligopoly is where 4 to 8 firms dominate the market.
- An oligopolist assumes competitors will not follow suit when he raises prices but will when he lowers prices.
- An oligopolist assumes competitors will not follow suit when he raises prices but will when he lowers prices.
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Producut differentiation
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Distinguising a product by name brand, color, or attributes.
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Game Theory
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A method of describing possible outcomes in various business situation. This is called oligopoly behavior
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Horizontal merger
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A merger involving companies that sell similar products.
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Price Discrimination
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Selling a product at more than one price where cos is not a consideration
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Pure rent
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Payment for any resource with a limited supply.
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Minimal Efficient Scale
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The lowest level at which a firm can minimize long range average costs.
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Utility
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Refers to the usefulness or satisfaction recieved from a product. The satisfaction a product provides.
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Marginal Utility
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The utility gained from consuming one more unit.
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Total utility
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is the increase in satisfaction a consumer realizes from consuming an additional unit of a product
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Price Floor
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Minimum price fixed by a firm or the government. *Leads to a surplus. IS ABOVE THE MARKET PRICE. *An example is farm subsidies.
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Price Ceiling
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The price ceiling is below market prices and is established by the government. It is the maximum legal price a seller can change. It leads to a shortage. An example is wage and price controls.
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Dmininshing marginal Returns
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Implies increasing marginal cost. Marginal returns and marginal products are the same thing.
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Substitution effect
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When the price of a product falls, people buy more of it.
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Implicit costs
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are payments made to the owners of the firm.
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Explicit Costs
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are payments made to the non-owners of the firm.
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Productivity
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An increase in capital investment increases the output per unit of input-the productivity of labor. A 1/4 % increase in investment will increase productivity by 1%. *The average product produced is a measure of output per worker.
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Production Costs
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A decrease in the cost of the inputs (factors) leads to lower per unit production costs. A shift in consumer tastes and preferences will cause total production to change.
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Average total cost
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Total fixed cost divided by quantity produced.
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Pareto Positive Superior Theorem
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Ive got something you want. You've got something I want. Lets make a deal.
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Interest and Dividends
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Interest is the price for the use of money. Dividends are income earned from investments. They are two forms of capital.
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Purchasing power
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A decline in price will increase the consumer's purchasing power.
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Retained earnings
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Corporate profits after taxes are divided into two categories, dividens and retained earnings. Retained earnings are used for internal financing.
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Depreciation
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is also called the consumption of fixed capital.
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Derived Demands
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The demand for the inputs or factors of production.
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Tariffs
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are a tax on imported goods. They are an excise tax.
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