Unit 3: Costs, Profit & Perfect Competition

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Explicit Cost

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Is a cost that involves actually laying out money.

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Implicit Cost

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Does not require an outlay of money; it is measured by the value, in dollar terms, of benefits that are forgone.

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Economic Profit

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Of a business is the business's total revenue minus the opportunity cost of its resources. It is usually less than the accounting profit.

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Implicit Cost Of Capital

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Is the opportunity cost of the capital used by a business the income of the owner could have realized from that capital if it had been used in its next best alternative way.

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Normal Profit

answer

An economic profit eaual to zero is also known as a normal profit. It is an economic profit just high neough to keep a firm engaged in its current activity.

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Principle Of Marginal Analysis

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Every activity should continue until marginal benefit equals marginal cost.

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Marginal Revenue

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Is the change in total revenue generated by an additional unit of output.

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Optimal Output Rule

answer

Says that profit is mazimized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its maginal cost.

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Marginal Cost Curve

answer

Shows how the cost of produing one more unit depends on the quantity that has already been produced.

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Marginal Revenue Curve

answer

Shows how marginal revenue varies as output varies.

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Production Function

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Is the relationship between the quantity of inputs a frim uses and the quantity of output it produces.

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Fixed Input

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Is an input whose quantity is fixed for a period of time and cannot be varied.

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Variable Input

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Is an input whose quantity the firm can cary at any time.

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Long Run

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Is the time period in which all inputs can be varied.

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Short Run

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Is the time period in which at least one input is fixed.

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Total Product Curve

answer

Shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input.

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Margianl Product

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Of an input is the additional quantity of output produced by using one more unit of that input.

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Diminishing Returns To An Input

answer

When an increase in the quantity of that input, holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input.

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Fixed Cost

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Is a cost that does not depend on the quantity of output produced. It is ithe cost of the fixed input.

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Variable Cost

answer

Is a cost that depends on the quantity of output produced, . It is the cost of the variable input.

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Total Cost

answer

Of producing a given quantity of output is the sum of the fixed cost and the variable cost of producing that quantity of output.

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Total Cost Curve

answer

Shoes how total cost depends on the quantity of output.

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Average Total Cost(Average Cost)

answer

Often referred to simply as average cost, is total cost divided by quantity of output produced.

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Average Variable Cost

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Is the variable cost per unit of output.

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Minimum-Cost Output

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Is the quantity of ouput at which average total cost is lowest- it correspons to the bottom of the U-shaped average total cost curve.

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Average Product

answer

Of an input is the total product divided by the quantity of the input.

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Average Product Curve

answer

For an input shows the relationship between the average product and the quantity of the input.

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Long-Run Average Total Cost Curve

answer

Shows the relationship between output and average totla cost when fixed cost has been chosen to minimize average total cost for each level of output.

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Economies Of Scale

answer

When long-run average total cost declines as output increases.

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Increasing Returns To Scale

answer

When output increases more than in proportion to an increase in all inputs. For example, with increasing returns to scale, doubling all inputs would cause output to more than double.

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Diseconomies Of Scale

answer

When long-run average total cost increases as output increases.

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Decreasing Returns To Scale

answer

When output increases less than in proportion to an increase in all inputs.

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Constant Returns To Scale

answer

When output increases directly in proportion to an increase in all inputs.

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Sunk Cost

answer

Is a cost that has already been incurred and is nonrecoverable. A sunk cost should be ignored in decision about future actions.

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Price-Taking Firm

answer

Is a firm whose actions have no effect on the market price of the good or service it sells.

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Price-Taking Consumer

answer

Is a consumer whose actions have no effect on the market price of the good or sercice he or she buys.

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Perfectly Competitive Market

answer

Is a market in which all market participants are price takers.

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Perfectly Competitive Insustry

answer

Is an industry in which firms are price takers.

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Market Share

answer

Is the fraction of the total insustry output accounted for by that firm's output.

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Standardized Product(Commodity)

answer

When consumers regard the products of different firms as the same good.

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Free Entry And Exit

answer

When new firms can easily enter into the industry and existing firms can easily leave the industry.

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Monopolist

answer

Is the only producer of a good that has no close substitutes. An industry controlled by a monopolist is known as a monopoly.

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Natural Monopoly

answer

Exists when economies of scale provide a large cost advantages to a single firm that produces all of an industry's output.

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Patent

answer

Gives an inventor a temporary monopoly in the use or sale of an invention.

question

answer

Gives the creator of a literary or artistic work the sole right to profit from that work for a specified period of time.

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Oligopoly

answer

Is an industry with only a small number of firms. A producer in such an industry is known as an oligopolist.

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Imperfect Competition

answer

When no one firm has a monopoly, but producres nonetheless realize that they can affect market prices, an industry is characterized by imperfect competition.

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Concentration Ratios

answer

Measures the percentage of industry sales accounted for by the "X" largest firms, for example the four-firm concentration ratio or the eight-firm concentration ratio.

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Herfindahl-Herschman Index

answer

Is the square of each firm's share of market sales summed over the industry. It gives a picture of the industry market structure.

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Monopolistic Competition

answer

Is a makert structure in which there are man competing firms in an industry, each firm sells a differentiated product, and there is free entry into and exit from the industry in the long run.

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Price-Taking Firm's Optimal Output Rule

answer

Says that a price-taking firm's profit is mazimized by producing the quantity of output at whcih the market price is equal to the margainal cost of the last unit produced.

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Break-Even Price

answer

Of a price-taking firm is the market parice at which it earns zero profit.

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Shut-Down Price

answer

A firm will cease production in the short run if the market price falls below the shut-down price, which is equal to mimum average variable cost.

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Short-Run Individual Supply Curve

answer

Shows how an individual firm's profit maximizing level of output depends on the market price, taking the fixed cost as given.

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Industry Supply Curve

answer

Shows the relationship between the price of a good and the total output of the industry as a whole.

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Short-Run Industry Supply Curve

answer

Shows how the quantity supplied by an industry depends on the market price, given a fixed number of firms.

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Short-Run Market Equilibrium

answer

When the quantity supplied equals the quantity demanded, taking the number of producers as given.

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Long-Run Market Equilibrium

answer

When the quantity supplied equals the quantity demanded, given that suffient time has elapsed for entry into and exit from the industry to occur.

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Long-Run Industry Supply Curve

answer

Shows how the quantity supplied responds to the price once producers have had time to enter or exit the industry.

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Increasing-Cost-Industry

answer

Is one with an upward-sloping long-run supply curve.

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Decreasing-Cost Industry

answer

Is one with a downward-sloping long-run supply curve.

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...

answer

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question

Explicit Cost

answer

Is a cost that involves actually laying out money.

question

Implicit Cost

answer

Does not require an outlay of money; it is measured by the value, in dollar terms, of benefits that are forgone.

question

Economic Profit

answer

Of a business is the business's total revenue minus the opportunity cost of its resources. It is usually less than the accounting profit.

question

Implicit Cost Of Capital

answer

Is the opportunity cost of the capital used by a business the income of the owner could have realized from that capital if it had been used in its next best alternative way.

question

Normal Profit

answer

An economic profit eaual to zero is also known as a normal profit. It is an economic profit just high neough to keep a firm engaged in its current activity.

question

Principle Of Marginal Analysis

answer

Every activity should continue until marginal benefit equals marginal cost.

question

Marginal Revenue

answer

Is the change in total revenue generated by an additional unit of output.

question

Optimal Output Rule

answer

Says that profit is mazimized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its maginal cost.

question

Marginal Cost Curve

answer

Shows how the cost of produing one more unit depends on the quantity that has already been produced.

question

Marginal Revenue Curve

answer

Shows how marginal revenue varies as output varies.

question

Production Function

answer

Is the relationship between the quantity of inputs a frim uses and the quantity of output it produces.

question

Fixed Input

answer

Is an input whose quantity is fixed for a period of time and cannot be varied.

question

Variable Input

answer

Is an input whose quantity the firm can cary at any time.

question

Long Run

answer

Is the time period in which all inputs can be varied.

question

Short Run

answer

Is the time period in which at least one input is fixed.

question

Total Product Curve

answer

Shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input.

question

Margianl Product

answer

Of an input is the additional quantity of output produced by using one more unit of that input.

question

Diminishing Returns To An Input

answer

When an increase in the quantity of that input, holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input.

question

Fixed Cost

answer

Is a cost that does not depend on the quantity of output produced. It is ithe cost of the fixed input.

question

Variable Cost

answer

Is a cost that depends on the quantity of output produced, . It is the cost of the variable input.

question

Total Cost

answer

Of producing a given quantity of output is the sum of the fixed cost and the variable cost of producing that quantity of output.

question

Total Cost Curve

answer

Shoes how total cost depends on the quantity of output.

question

Average Total Cost(Average Cost)

answer

Often referred to simply as average cost, is total cost divided by quantity of output produced.

question

Average Variable Cost

answer

Is the variable cost per unit of output.

question

Minimum-Cost Output

answer

Is the quantity of ouput at which average total cost is lowest- it correspons to the bottom of the U-shaped average total cost curve.

question

Average Product

answer

Of an input is the total product divided by the quantity of the input.

question

Average Product Curve

answer

For an input shows the relationship between the average product and the quantity of the input.

question

Long-Run Average Total Cost Curve

answer

Shows the relationship between output and average totla cost when fixed cost has been chosen to minimize average total cost for each level of output.

question

Economies Of Scale

answer

When long-run average total cost declines as output increases.

question

Increasing Returns To Scale

answer

When output increases more than in proportion to an increase in all inputs. For example, with increasing returns to scale, doubling all inputs would cause output to more than double.

question

Diseconomies Of Scale

answer

When long-run average total cost increases as output increases.

question

Decreasing Returns To Scale

answer

When output increases less than in proportion to an increase in all inputs.

question

Constant Returns To Scale

answer

When output increases directly in proportion to an increase in all inputs.

question

Sunk Cost

answer

Is a cost that has already been incurred and is nonrecoverable. A sunk cost should be ignored in decision about future actions.

question

Price-Taking Firm

answer

Is a firm whose actions have no effect on the market price of the good or service it sells.

question

Price-Taking Consumer

answer

Is a consumer whose actions have no effect on the market price of the good or sercice he or she buys.

question

Perfectly Competitive Market

answer

Is a market in which all market participants are price takers.

question

Perfectly Competitive Insustry

answer

Is an industry in which firms are price takers.

question

Market Share

answer

Is the fraction of the total insustry output accounted for by that firm's output.

question

Standardized Product(Commodity)

answer

When consumers regard the products of different firms as the same good.

question

Free Entry And Exit

answer

When new firms can easily enter into the industry and existing firms can easily leave the industry.

question

Monopolist

answer

Is the only producer of a good that has no close substitutes. An industry controlled by a monopolist is known as a monopoly.

question

Natural Monopoly

answer

Exists when economies of scale provide a large cost advantages to a single firm that produces all of an industry's output.

question

Patent

answer

Gives an inventor a temporary monopoly in the use or sale of an invention.

question

answer

Gives the creator of a literary or artistic work the sole right to profit from that work for a specified period of time.

question

Oligopoly

answer

Is an industry with only a small number of firms. A producer in such an industry is known as an oligopolist.

question

Imperfect Competition

answer

When no one firm has a monopoly, but producres nonetheless realize that they can affect market prices, an industry is characterized by imperfect competition.

question

Concentration Ratios

answer

Measures the percentage of industry sales accounted for by the "X" largest firms, for example the four-firm concentration ratio or the eight-firm concentration ratio.

question

Herfindahl-Herschman Index

answer

Is the square of each firm's share of market sales summed over the industry. It gives a picture of the industry market structure.

question

Monopolistic Competition

answer

Is a makert structure in which there are man competing firms in an industry, each firm sells a differentiated product, and there is free entry into and exit from the industry in the long run.

question

Price-Taking Firm's Optimal Output Rule

answer

Says that a price-taking firm's profit is mazimized by producing the quantity of output at whcih the market price is equal to the margainal cost of the last unit produced.

question

Break-Even Price

answer

Of a price-taking firm is the market parice at which it earns zero profit.

question

Shut-Down Price

answer

A firm will cease production in the short run if the market price falls below the shut-down price, which is equal to mimum average variable cost.

question

Short-Run Individual Supply Curve

answer

Shows how an individual firm's profit maximizing level of output depends on the market price, taking the fixed cost as given.

question

Industry Supply Curve

answer

Shows the relationship between the price of a good and the total output of the industry as a whole.

question

Short-Run Industry Supply Curve

answer

Shows how the quantity supplied by an industry depends on the market price, given a fixed number of firms.

question

Short-Run Market Equilibrium

answer

When the quantity supplied equals the quantity demanded, taking the number of producers as given.

question

Long-Run Market Equilibrium

answer

When the quantity supplied equals the quantity demanded, given that suffient time has elapsed for entry into and exit from the industry to occur.

question

Long-Run Industry Supply Curve

answer

Shows how the quantity supplied responds to the price once producers have had time to enter or exit the industry.

question

Increasing-Cost-Industry

answer

Is one with an upward-sloping long-run supply curve.

question

Decreasing-Cost Industry

answer

Is one with a downward-sloping long-run supply curve.

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