Unit 3: Production, Cost and the Perfect Competition Model

question

explicit cost

answer

a cost that involves actually laying out money.

question

implicit cost

answer

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

question

accounting profit

answer

a business's total revenue minus the explicit cost and depreciation.

question

economic profit

answer

a 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

the opportunity cost of the capital used by a business— the income 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 equal to zero. It is an economic profit just high enough to keep a firm engaged in its current activity.

question

principle of marginal analysis

answer

the principle that states that every activity should continue until marginal benefit equals marginal cost.

question

marginal revenue

answer

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

question

optimal output rule

answer

the rule that says that profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost.

question

marginal cost curve

answer

a curve that shows how the cost of producing one more unit depends on the quantity that has already been produced.

question

marginal revenue curve

answer

a curve that shows how marginal revenue varies as output varies.

question

production function

answer

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

question

fixed input

answer

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

question

variable input

answer

an input whose quantity the firm can vary at any time.

question

long run

answer

the time period in which all inputs can be varied.

question

short run

answer

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

question

total product curve

answer

a curve that shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input.

question

marginal product

answer

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

question

diminishing returns to an input

answer

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

question

total physical product

answer

how many units of a firm's good or service it can produce in a specified period of time.

question

average physical product

answer

how many units of output are produced by an average unit of labor (the variable resource).

question

marginal physical product

answer

the change in total product when the firm adds an extra unit of labor to its fixed stock of capital.

question

fixed cost

answer

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

question

variable cost

answer

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

question

total cost

answer

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

question

total cost curve

answer

a curve that shows how total cost depends on the quantity of output.

question

average total cost (average cost)

answer

total cost divided by quantity of output produced.

question

u-shaped average total cost curve

answer

an average total cost curve that falls at low levels of output and then rises at higher levels.

question

average fixed cost

answer

the fixed cost per unit of output.

question

average variable cost

answer

the variable cost per unit of output.

question

spreading effect

answer

the larger the output, the greater the quantity of output over which fixed cost is spread, leading to lower average fixed cost.

question

diminishing returns effect

answer

the larger the output, the greater the amount of variable input required to produce additional units, leading to higher average variable cost.

question

minimum-cost output

answer

the quantity of output at which average total cost is lowest—it corresponds to the bottom of the U-shaped average total cost curve.

question

average product

answer

the total product divided by the quantity of the input.

question

average product curve

answer

a curve that shows the relationship between the average product and the quantity of the input.

question

long-run average total cost curve

answer

the relationship between output and average total 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, 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

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

question

price-taking firm

answer

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

question

price-taking consumer

answer

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

question

perfectly competitive market

answer

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

question

perfectly competitive industry

answer

an industry in which firms are price-takers.

question

market share

answer

the fraction of the total industry output accounted for by a firm's output.

question

standardized product (commodity)

answer

what a good is 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

the only producer of a good that has no close substitutes.

question

monopoly

answer

an industry controlled by a monopolist

question

barrier to entry

answer

something that prevents other firms from entering the industry.

question

natural monopoly

answer

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

question

patent

answer

an exclusive right that gives an inventor a temporary monopoly in the use or sale of an invention.

question

answer

an exclusive right that 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

an industry with only a small number of firms.

question

oligopolist

answer

a producer in an oligopoly.

question

imperfect competition

answer

when no one firm has a monopoly, but producers nonetheless realize that they can affect market prices.

question

concentration ratios

answer

ratios that measure 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-Hirschman Index (HHI)

answer

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

a market structure in which there are many 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

the rule that says that a price-taking firm's profit is maximized by producing the quantity of output at which the market price is equal to the marginal cost of the last unit produced.

question

break-even price

answer

(of a price-taking firm) the market price 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 minimum average variable cost.

question

short-run individual supply curve

answer

a curve that 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

a curve that 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

a curve that 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 sufficient time has elapsed for entry into and exit from the industry to occur.

question

long-run industry supply curve

answer

a curve that shows how the quantity supplied responds to the price once producers have had time to enter or exit the industry.

question

constant-cost industry

answer

an industry with a horizontal (perfectly elastic) long-run supply curve.

question

increasing-cost industry

answer

an industry with an upward-sloping long-run supply curve.

question

decreasing-cost industry

answer

an industry with a downward-sloping long-run supply curve.

question

minimum efficient scale

answer

the balance point at which a company can produce goods at a competitive price. Achieving this point minimizes long-run average total cost (LRATC).

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question

explicit cost

answer

a cost that involves actually laying out money.

question

implicit cost

answer

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

question

accounting profit

answer

a business's total revenue minus the explicit cost and depreciation.

question

economic profit

answer

a 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

the opportunity cost of the capital used by a business— the income 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 equal to zero. It is an economic profit just high enough to keep a firm engaged in its current activity.

question

principle of marginal analysis

answer

the principle that states that every activity should continue until marginal benefit equals marginal cost.

question

marginal revenue

answer

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

question

optimal output rule

answer

the rule that says that profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost.

question

marginal cost curve

answer

a curve that shows how the cost of producing one more unit depends on the quantity that has already been produced.

question

marginal revenue curve

answer

a curve that shows how marginal revenue varies as output varies.

question

production function

answer

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

question

fixed input

answer

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

question

variable input

answer

an input whose quantity the firm can vary at any time.

question

long run

answer

the time period in which all inputs can be varied.

question

short run

answer

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

question

total product curve

answer

a curve that shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input.

question

marginal product

answer

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

question

diminishing returns to an input

answer

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

question

total physical product

answer

how many units of a firm's good or service it can produce in a specified period of time.

question

average physical product

answer

how many units of output are produced by an average unit of labor (the variable resource).

question

marginal physical product

answer

the change in total product when the firm adds an extra unit of labor to its fixed stock of capital.

question

fixed cost

answer

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

question

variable cost

answer

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

question

total cost

answer

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

question

total cost curve

answer

a curve that shows how total cost depends on the quantity of output.

question

average total cost (average cost)

answer

total cost divided by quantity of output produced.

question

u-shaped average total cost curve

answer

an average total cost curve that falls at low levels of output and then rises at higher levels.

question

average fixed cost

answer

the fixed cost per unit of output.

question

average variable cost

answer

the variable cost per unit of output.

question

spreading effect

answer

the larger the output, the greater the quantity of output over which fixed cost is spread, leading to lower average fixed cost.

question

diminishing returns effect

answer

the larger the output, the greater the amount of variable input required to produce additional units, leading to higher average variable cost.

question

minimum-cost output

answer

the quantity of output at which average total cost is lowest—it corresponds to the bottom of the U-shaped average total cost curve.

question

average product

answer

the total product divided by the quantity of the input.

question

average product curve

answer

a curve that shows the relationship between the average product and the quantity of the input.

question

long-run average total cost curve

answer

the relationship between output and average total 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, 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

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

question

price-taking firm

answer

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

question

price-taking consumer

answer

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

question

perfectly competitive market

answer

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

question

perfectly competitive industry

answer

an industry in which firms are price-takers.

question

market share

answer

the fraction of the total industry output accounted for by a firm's output.

question

standardized product (commodity)

answer

what a good is 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

the only producer of a good that has no close substitutes.

question

monopoly

answer

an industry controlled by a monopolist

question

barrier to entry

answer

something that prevents other firms from entering the industry.

question

natural monopoly

answer

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

question

patent

answer

an exclusive right that gives an inventor a temporary monopoly in the use or sale of an invention.

question

answer

an exclusive right that 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

an industry with only a small number of firms.

question

oligopolist

answer

a producer in an oligopoly.

question

imperfect competition

answer

when no one firm has a monopoly, but producers nonetheless realize that they can affect market prices.

question

concentration ratios

answer

ratios that measure 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-Hirschman Index (HHI)

answer

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

a market structure in which there are many 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

the rule that says that a price-taking firm's profit is maximized by producing the quantity of output at which the market price is equal to the marginal cost of the last unit produced.

question

break-even price

answer

(of a price-taking firm) the market price 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 minimum average variable cost.

question

short-run individual supply curve

answer

a curve that 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

a curve that 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

a curve that 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 sufficient time has elapsed for entry into and exit from the industry to occur.

question

long-run industry supply curve

answer

a curve that shows how the quantity supplied responds to the price once producers have had time to enter or exit the industry.

question

constant-cost industry

answer

an industry with a horizontal (perfectly elastic) long-run supply curve.

question

increasing-cost industry

answer

an industry with an upward-sloping long-run supply curve.

question

decreasing-cost industry

answer

an industry with a downward-sloping long-run supply curve.

question

minimum efficient scale

answer

the balance point at which a company can produce goods at a competitive price. Achieving this point minimizes long-run average total cost (LRATC).

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