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Perfect Competition

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.

Perfectly Elastic

The demand curve for a perfectly competitive market is a horizontal line.

Unitary Elastic

A price change leads to no change in the demand for the product

Perfectly Inelastic

When the price changes and there is no change in demand

Elasticity of Demand

Responsiveness of demand to a change in a product price

Elastic Demand

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.

Inelastic Demand

A one percent change in price leads to a less than one percent change in demand.

Total coST

is fixed cost plus variable cost.

Fixed Costs

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*

Variable costs

vary with changes in inputs. In the long run all costs are variable costs.

Total Revenue

Quantity times price (Q x P)

Marginal Product

Producing one more unit. The change in total production associated with producing one more unit.

Marginal Cost

The increase in total costs prom producing one more unit.


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*

Short-Run Breakeven (TR=TC)

The point at which a firm earns normal or accounting profits. *When total revenues equal total costs there are accounting profits only*

Economic Profits

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.

Profit Maximization --(MR=MC)

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.

Least combination of resources

All firms seek to maximize profits by using the combination of labor and technology that minimizes costs.

Revenue Maximization (TR>TC)

break even occurs at the long run, second breakeven; accounting profits occur both at the short-run and the long run breakeven.

Marginal Revenue

Increase in Total Revenues from adding one more unit of a product

Functions of price

Price organizes the market, rations scarce goods, steers resources to their most efficient or profitable use.

Economies of scale

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.

Dis-Economies of Scale

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.

Constant Return to Scale

One unit IN, one unit OUT. If input doubles, output doubles.

Natural Monopoly

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.

Monopoly & Monopolist

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.

Government Barriers And Monopoly

In order for a monopoly to exsist, there must be barriers.

Patients, Copyrights and Trademarks

The barriers that prevent competition and protect a monopoly. Government sanctioned monopolies.

Monopoly Demand Curve and Profits

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.

Price Searcher-Trial and error

Monopoly firms use trial and error to find the price that maximizes profit. They are price searchers.

Price Taker

Firms in a perfectly competitive market

Monopolistic competition

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.

Kinked Demand cURVE

An analysis used to explain why price changes are infrequent in an oligopoly.** In kinked demand theory, price tends to be inflexible.


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.


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.

Producut differentiation

Distinguising a product by name brand, color, or attributes.

Game Theory

A method of describing possible outcomes in various business situation. This is called oligopoly behavior

Horizontal merger

A merger involving companies that sell similar products.

Price Discrimination

Selling a product at more than one price where cos is not a consideration

Pure rent

Payment for any resource with a limited supply.

Minimal Efficient Scale

The lowest level at which a firm can minimize long range average costs.


Refers to the usefulness or satisfaction recieved from a product. The satisfaction a product provides.

Marginal Utility

The utility gained from consuming one more unit.

Total utility

is the increase in satisfaction a consumer realizes from consuming an additional unit of a product

Price Floor

Minimum price fixed by a firm or the government. *Leads to a surplus. IS ABOVE THE MARKET PRICE. *An example is farm subsidies.

Price Ceiling

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.

Dmininshing marginal Returns

Implies increasing marginal cost. Marginal returns and marginal products are the same thing.

Substitution effect

When the price of a product falls, people buy more of it.

Implicit costs

are payments made to the owners of the firm.

Explicit Costs

are payments made to the non-owners of the firm.


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.

Production Costs

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.

Average total cost

Total fixed cost divided by quantity produced.

Pareto Positive Superior Theorem

Ive got something you want. You've got something I want. Lets make a deal.

Interest and Dividends

Interest is the price for the use of money. Dividends are income earned from investments. They are two forms of capital.

Purchasing power

A decline in price will increase the consumer's purchasing power.

Retained earnings

Corporate profits after taxes are divided into two categories, dividens and retained earnings. Retained earnings are used for internal financing.


is also called the consumption of fixed capital.

Derived Demands

The demand for the inputs or factors of production.


are a tax on imported goods. They are an excise tax.

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