| Term | Definition |
|---|
| Fixed Costs | Cost of production that does NOT vary with level of output. Fixed costs must be paid even with the firm does not produce. |
| Variable Costs | Costs that vary directly with the level of output. Variable costs equal zero when production ceases. |
| Labor Productivity | Output per worker per hour. |
| Total Costs | Sum of fixed and variable costs. TC = TFC + TVC |
| TC | Total Cost |
| TFC | Total Fixed Cost |
| TVC | Total Variable Cost |
| Average Costs | Costs per unit of output. |
| Average Total Costs | Total Costs divided by quantity. ATC = TC/Q |
| Average Fixed Costs | Total Fixed Costs divided by quantity. AFC = TFC/Q |
| Average Variable Costs | Total Variable Costs divided by quantity. AVC - TVC/Q |
| ATC | Average Total Costs (Declines, reaches a minimum, then increases as more of a good is produced.) |
| AFC | Average Fixed Costs (Declines as output increases.) |
| AVC | Average Variable Costs (Declines, reaches a minimum, then increases as more of a good is produced.) |
| Marginal Costs | The change in total costs divided the change in quantity. MC = change TC/change Q |
| MC | Marginal Costs |
| Economies of Scale | The property whereby long-run average total cost falls as the quantity of output increases (left-most downward sloping part of the long-run ATC) |
| Diseconomies of Scale | The property whereby long-run average total cost rises as the quantity of output increases (right-most upward sloping part of the long-run ATC) |
| Rightsizing | A successful effort to achieve an appropriate size at which the company performs most effectively. |
| Downsizing | Implementing a firm's decision to decrease its plant size to produce in the most efficient manner. |
| Outsourcing | Process of purchasing goods and services from outside vendors rather than producing the same goods or providing the same services within the organization |
| Constant Returns to Scale | Costs per unit of production are the same for any level of production. Changes in plant size do not affect the firm's ATC. |
| Explicit Costs | Input costs that require an outlay of money by the firm (e.g. rent). Money that actually leaves a firm in the productive process. |
| Implicit Costs | Input costs that do not require an outlay of money by the firm (e.g. interest forgone on money used). The opportunity costs associated with a firm's use of resources that it owns. |
| Accounting Profit | Total revenue minus total explicit costs. |
| Economic Profit | Total revenue minus total cost, including both explicit and implicit costs - accounting profit minus the opportunity costs. |
| Normal Profit | The opportunity cost of the resources supplied by the firm's owners; normal profit= accounting profit - economic profit |
| Profit Maximization | Primary goal of any firm - to earn the most profit possible from the sale of its goods or services. |
| Profit | Income earned by firms. (Profit = TR - TC) |
| π (Pi sign) | π is used to symbolize profit. (π = TR - TC) |
| Average Revenue | Revenue per unit produced. (AR = TR/Q) NOTE: AR always equals Price. |
| Marginal Revenue | The extra revenue earned from producing an extra unit of a good. The change in total revenue divided by the change in quantity. (MR = change TR/change Q) |
| AR | Average Revenue |
| MR | Marginal Revenue |
| MR = MC Rule | The guide by which firms maximize profit (or minimize loss.) |
| Loss Minimization | When a firm faces the certainty of incurring losses, its goal is to incur the lowest loss possible with the production of its goods and services. |
| Shutdown | Ceasing operations - the firm's loss minimization occurs at zero output. |
| Revelant Market | A set of goods for which Ecp with others in the set are relatively high and whose Ecp with goods outside the set are relatively low. |
| Market Structure | The key traits of a market, including the number and size of firms, the extent to which the products of various firms are different or similiar, ease of entry and exit, and availability of information. |
| Mutual Interdependence | The situation that exists when two or more firms need each other and must depend on each other to accomplish a goal that is important to each of them. Characteristic of oligopoly - any price change made by one firm affects the pricing behavior of all other firms in the oligopoly. |
| Monopoly | Market structure consisting of one firm producing a good for which there is no close substitutes - the firm is the industry. (Note - a firm does NOT have to be LARGE to be a monopoly!) |
| Industry | A collection of firms producing the same good - examples: tire industry, cereal industry, etc. |
| Natural Monopoly | One firm that can supply the entire market at a lower per-unit cost than could two or more firms - example: electricity |
| Patent | An exclusive, government granted right given to a firm or a person to make and sell an invention for 20 years. |
| Monopolistic Competition | Market structure of an industry in which there are many firms and freedom of entry and exit but in which each firm has a product somewhat differentiated from the others, giving it some control over its price |
| Oligopoly | Market structure dominated by a small number of sellers. The word is derived from the Greek for few sellers. Because there are few participants in this type of market, each oligopolist is aware of the actions of the others. The decisions of one firm influence, and are influenced by the decisions of other firms. |
| Product Differentiation | The actual or perceived differences among goods which make them close, but not perfect, substitutes. |
| Brand Loyalty | The willingness of consumers to continue buying a good at a price higher than the price of its close substitutes. |
| Market Share | Percentage of total market share produced by a particular firm in a market. |
| Market Power | The ability of a single firm or group of firms to have a substantial influence on market prices. |
| Perfect Competition | The market situation in which there are many sellers in a market and no seller is large enough to dictate the price of a product. |
| Perfectly Horizontal Demand Curve | The demand curve faced by a producer operating in perfect competition. The demand curve is perfectly elastic - raising price causes a total loss of customers, lowering costs lowers total revenue. |
| Price Maker | A firm whose own activity in the market affects price. The firm has the ability to choose among combinations of price and output. Firms operating as monopolists, oligopolists, and monopolistic competitors are price makers. |
| Price Taker | A firms that accepts market price as a given and has no ability to influence price. Firms operating in perfect competition are price takers. |
| Schumpeter Hypothesis | "It ain't necessarily so!" The idea that monpoly outcomes are "ipso facto" evil - monopolies don't always end up producing at higher prices, but are able to produce because modern techonolgy creates enourmous economies of scale. |
| Concentration Ratio | A measure of market power - the percentage of all sales that is accounted for by the four or eight largest firms in the market |
| Unbalanced Oligopoly | An oligopoly in which the sales of the leading (top four) firms are distributed unevenly among them. |
| Balanced Oligopoly | An oligopoly in which the sales of the leading (top four) firms are relatively balanced among them. |
| Merger | A combination of two or more companies into one company. |
| Horizontal Merger | A merger between two firms in the same industy. Example: 2004 K-Mart merged with Sears |
| Vertical Merger | A merger between firms who have a buyer/supplier relationship. Example: BFGoodrich merging with rubber plantations. |
| Conglomerate Merger | A merger of firms in unrelated industries. Example: If Purina Dow Chow merged with Pampers Diaper Company. |
| Joint Venture | A business arrangement in which two or more firms undertake a specific economic activity together. Once the activity is over, the firms go their own way. |
| Cartel | A group of firms that collude to limit competiton in a market by negotiating and accepting agreed-upon prices and market shares. |
| Collusion | An agreement among firms in a market about quantities to produce or prices to charge in attempts to limit competiton. |
| Payoff Matrix | A table that shows the payoffs that each firm earns from every combination of strategies by the firms. |
| Game Theory | The theory that studies decision making in situations in which one player anticipates the reactions of other players to its own actions. Firms are mutually interdendent. |
| Nash Equilibrium | Any combination of strategies in which each players' strategy is his or her best choice, given the other players' strategies. |
| Tit-for-Tat Strategy | A pricing strategy in game theory in which firms continue to match each others' pricing strategy. |
| Mutual Interdependence | The situation that exists when two or more groups need each other and must depend on each other to accomplish a goal that is important to each of them |
| Prisoners' Dilemma | A particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial to do so. |
| Price Leadership | A firm whose price decisions are tacitly accepted and followed by others in the industry. |
| Godfather | The dominate firm in the oligopoly, whose pricing decisions are tacitly followed. The Godfather is the price leader. |
| Kinked Demand Curve | The demand curve faced by an oligopolist. The curve is more elastic when the firm raises its price than when it lowers its price. |
| Brand Multiplication | Variations on one good so that a firm can increase market share. |
| Price Discrimination | Offering specific goods or services at different prices to different segments of the market. Example: First class versus business class on airlines. |
| Regulating Monopoly | Least disruptive means of dealing with monopolies and monopoly power. |
| Nationalizing Industries | Industries taken over by the government to be run and controlled. Example: Amtrak |
| Laissez-Faire | Government's internvention policy concerning monopoly - leave the firm alone. |
| Contestable Market | The potential threat of other firms entering the market moderates prices in a monopolistic market. |
| Encouraging Concentration | Government's encouragement of less-competitive markets who thrive because they are technically superior, which in turn generates lower prices due to economies of scale production. |
| Splitting Up Monopoly | Because monopolies "violate the rules of the game," government should break up monopolies into smaller firms. |
| Regulation | Government intervention to alter the behavior of the firms - while ownership remains private, pricing and production decisions are monitored by a regulatory agency, reporting directly to a government body. |
| Deregulation | The process by which governments remove, reduce, or simplify restrictions on business and individuals with the intent of encouraging the efficient operation of markets. |
| Nationalization | Taking an industry or assets into the public ownership and control of the national government - price and production decsions are made by an administration agency of the federal government. |
| Antitrust Policy | The body of laws that foster market competition by prohibiting monopolies and oligopolies from exercising excessive market power. |
| Sherman Antitrust Act of 1890 | Antitrust legistation stating: "Every contract, combination, or conspiracy in restraint of trade is declared to be illegal." Terminology in the act was vague and difficult to prove. |
| Clayton Act of 1914 | Defined four specific anticompetitive activities, making antitrust easier to enforce. |
| Federal Trade Commission Act of 1914 | Established the FTC to monitor markets - investigating unfair and deceptive practices and initiating complaints as needed. |
| Rule of Reason | The rule that to be illegal, an action must be unreasonable in a competitive sense and the anticompetitive effects must be demonstrated. Size alone is insufficient evidence to rule against a firm in antitrust lawsuits. |
| Per Se | A judicial standard by which the size of a firm alone is sufficient evidence to rule against a firm in antitrust cases. |
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