| Term | Definition |
|---|
| Marginal Product of Labor MPL | The change in output from one additional unit of labor |
| Economic Cost | explicit costs plus its implicit costs |
| Accounting Cost | Explicit Cost |
| Accounting Profit | Total Revenue - Accounting Cost |
| Economic Profit | Total Revenue - Economic Cost |
| Implicit Cost | The opportunity cost of the inputs that do not require a monetary payment. |
| Explicit Cost | Monetary payments for inputs |
| Diminishing Returns | As one input increases while the other inputs are held fixed, output increases at a decreasing rate |
| Total-product curve | A curve showing the relationship between the quantity of labor and the quantity of output produced, ceteris paribus |
| Fixed Cost FC | Cost that does not vary with the quantity produced |
| Variable Cost VC | Cost that varies with the quantity produced |
| Short-Run Total Cost TC | The total cost of production when at least one input is fixed; equal to fixed cost plus variable cost |
| Average Fixed Cost AFC | Fixed cost divided by the quantity produced |
| Average Variable Cost AVC | Variable cost divided by the quantity produced |
| Short-Run Average Total Cost ATC | Short-Run total cost divided by the quantity produced; equal to AFC plus AVC |
| Short-Run Marginal Cost | The change in short-run total cost resulting from a one-unit increase in output |
| ATC | TC/Q = FC/Q + VC/Q = AFC + AVC |
| MC | changeTC/changeQ = change in TC / change in output |
| Long-Run Total Cost LTC | The total cost of production when a firm is perfectly flexible in choosing its inputs |
| Long-Run Average Cost LAC | The long-run cost divided by the quantity produced |
| Constant Returns To Scale | A situation in which the long-run total cost increases proportionately with output, so average cost is constant |
| Long-Run Marginal Cost LMC | The change in long-run cost resulting from a one-unit increase in output |
| Indivisible Input | An input that cannot be scaled down to produce a smaller quantity of output |
| Economies Of Scale | A situation in which the long-run average cost of production decreases as output increases |
| Minimum Efficient Scale | The output at which scale economies are exhausted |
| Diseconomies Of Scale | A situation in which the long-run average cost of production increases as output increases |
| Perfectly Competitive Market | A market with many sellers and buyers of a homogeneous product and no barriers to entry |
| Price Taker | A buyer or seller that takes the market price as given |
| Firm-Specific Demand Curve | A curve showing the relationship between the price charged by a specific firm and the quantity the firm can sell |
| Monopolistic Demand Curve | Downward Sloping Demand Curve |
| Perfectly Competitive Firm Demand Curve | Straight Line Demand Curve |
| Monopoly | A market in which a single firm sells a product that does not have any close substitutes |
| Monopolistic Competition | A market served by many firms that sell slightly different products |
| Oligopoly | A market served by a few firms |
| Marginal Revenue | The change in total revenue from selling one more unit of output |
| Marginal Revenue of a Perfectly Competitive Firm | The price |
| Break-Even Price | The price at which economic profit is zero; price equals average total cost |
| Economic Profit | (price - average cost) x quantity produced |
| Shut-Down Price | The price at which the firm is indifferent between operating and shutting down; equal to the minimum average variable cost |
| Sunk Cost | A cost that a firm has already paid or committed to pay, so it cannot be recovered |
| Short-Run Supply Curve | A curve showing the relationship between the market price of a product and the quantity of output supplied by a firm in the short run |
| Short-Run Market Supply Curve | A curve showing the relationship between market price and the quantity supplied in the short run |
| Long-Run Market Supply Curve | A curve showing the relationship between the market price and quantity supplied in the long run |
| Increasing-Cost Industry | An industry in which the average cost of production increases as the total ouput of the industry increases; the long-run supply curve is positively sloped |
| Market Power | The ability of a firm to affect the price of its product |
| Barrier to Entry | Something that prevents firms from entering a profitable market |
| Patent | The exclusive right to sell a new good for some period of time |
| Network Externalities | The value of a product to a consumer increases with the number of other consumers who use it |
| Natural Monopoly | A market in which the economies of scale in production are so large that only a single large firm can earn a profit |
| Marginal Revenue Formula | New Price + (slope of demand curve X old quantity) |
| Profit | Total Revenue - Total Cost |
| Deadweight Loss From Monopoly | A measure of the inefficiency from a monopoly; equal to the decrease in the market surplus |
| Rent-Seeking | The process of using public policy to gain economic profit |
| Area of a Triangle | 1/2 base x height |
| Price Discrimination | The practice of selling a good at different prices to different consumers |
| Three Price Discrimination Conditions | Market Power, Different Consumer Groups, Resale Is Not Possible |
| A monopolist maximizes profit by | Picking the quantity at which marginal revenue equals marginal cost |
| Product Differentiation | The process used by firms to distinguish their products from the products of competing firms |
| Game Theory | The study of decision making in strategic situations |
| Concentration Ratio | The percentage of the market output produced by the largest firms |
| Concentration Ratio CR | S1+S2+S3+S4 = |
| Herfindahl-Hirschman Index HHI | Calculated by squaring the market share of each firm in the market and then summing the resulting numbers |
| Duopoly | A market with two firms |
| Cartel | A group of firms that act in unison, coordinating their price and quantity decisions |
| Price-Fixing | An arrangement in which firms conspire to fix prices |
| Game Tree | A graphical representation of the consequences of different actions in a strategic setting |
| Dominant Strategy | An action that is the best choice for a player, no matter what the other player does |
| Duopolists' Dilemma | A situation in which both firms in a market would be better off if both chose the high price, but each chooses the low price |
| Nash Equilibrium | An outcome of a game in which each player is doing the best he or she can, given the action of the other players |
| Grim-Trigger Strategy | A strategy where a firm responds to underpricing by choosing a price so low that each firm makes zero economic profit |
| Tit-For-Tat | A strategy where one firm chooses whatever price the other firm chose in the preceding period |
| Price-Leadership | A system under which one firm in an oligopoly takes the lead in setting prices |
| kinked Demand Curve model | A model in which firms in an oligopoly match price cuts by other firms, but do not match price hikes |
| Payoff matrix | A matrix or table that shows, for each possible outcome of a game, the consequences for each player |
| Limit Pricing | The strategy of reducing the price to deter entry |
| Limit Price | The price that is just low enough to deter entry |
| Contestable Market | A market with low entry and exit costs |
Combine with other sets
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