Theory of the Firm Test 2 Definitions
Terms in this set (13)
Exists when goods are produced at the lowest possible cost per unit of output. This is achieved at the point where average total cost is at its lowest value, i.e, where MC=AC.
Occurs where suppliers are producing the optimal mix of goods and services required by consumers. In this scenario, the firm sells the last unit it produces at the amount that it cost to make it. It is the level of output where MC=AR.
A market structure where there are a very large number of small firms, producing identical products. No individual firm is capable of affecting the market supply curve and thus cannot affect the market price. Because of this, the firms are price takers. There are no barriers to entry or exit and all the firms have perfect knowledge of the market.
A market form where there is only one firm supplying the market, so the firm is the industry. Monopolies usually have high barriers to entry, enabling them to make abnormal profits in the long run.
Barriers to entry
Obstacles in the way of potential newcomers to a market, such as economies of scale, brand loyalty, and legal protection.
A natural monopoly is said to exist if the market size in relation to the available production technology is such that two firms cannot profitably exist. There are only enough economies of scale available in a market to support one firm.
A market structure where there are many sellers producing differentiated products, with no barriers to entry or exit.
A form of non-price competition where suppliers attempt to make their products different (or perceived to be different) from those of their competitors. Examples include differences in quality, performance, design, styling, or packaging.
Concentration ratios measure the proportion of total market share controlled by a given number of firms. A high concentration ratio in an industry tends to identify the industry as an oligopoly.
A market structure where there are a few large firms that dominate the market. A key feature is that of interdependence between firms, and there tends to be price rigidity.
A group of firms in an industry that join together to limit competition between member firms, fix prices, and maximize joint profits as if the firms were collectively a monopoly. These are usually illegal in most countries.
Where firms in an oligopoly do not resort to agreements to fix prices or output. Competition tends to be non-price and prices tend to be stable, with firms developing strategies that take into account all possible reactions of their rivals when making pricing decisions.
Price discrimination occurs when a producer charges a different price to different customers for an identical good or service, according to the willingness/ability of different consumers to pay for it. The price difference is not justified by differences in cost.