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| The payment that must be made to obtain and retain the services of a resource (regardless of whether the resource is one purchased from the outside or already owned). |
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| The monetary payments a firm makes to those from whom it must purchase resources that it does not own. |
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| The opportunity costs of using the resources that it already owns to make the firm's own product rather than selling those resources to outsiders. |
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Profit number that accountants calculate by subtracting total explicit costs from total sales revenue.
Accounting Profit = Total Revenue - Explicit Costs |
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Profit number obtained by subtracting all economic costs both explicit and implicit in nautre from the total sales revenue.
Economic Profit = Total Revenue - (Explicit Costs + Implicit Costs) |
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| The "typical" amount of accounting profit that an individual would most likely have earned in a different business venture. |
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| Period too brief for a firm to alter its plant capacity, yet enough time to vary its output by using the plant capcity more or less intensively. |
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| Period long enough for the firm to adjust the quantities of all the resources it employs including plant capacity. |
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| The total quantity or total output of a particular good or service produced. |
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Extra output of product associated with adding a unit of a variable resource (labor) to the production process.
Marginal Product = Change in Total Product
Change in Labor Input |
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Labor productivity that is the output per unit of labor input.
Average Product = Total Product
Units of Labor |
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Term
| Law of Diminishing Marginal Returns |
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Definition
| States that as successive units of a variable resource are added to a fixed resource beyond some point the marginal product that can be attributed to each additional unit of the variable resource will decline. Total product graph progresses through three phases - increasing product at increasing rate, increasing product at decreasing rate, and declining product. Marginal product curve is reflective of the slope on total product curve to the point that when total product is maximum, marginal product is zero. Marginal product intersects average product where average product is at maximum. |
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| Costs that do not vary with changes in output and area ssociated with the firm's very existence. |
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| Costs that change with the level of output often associated with variable resources, fuel, power, and transportation. |
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| The sum of fixed costs and variable costs at each level of output and at zero, total cost is solely the firm's fixed cost. Graphically, total variable cost is measured vertically from the x-axis and then total fixed cost is added to TVC curve to obtain the TC curve. |
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| Found by dividing the total fixed cost by the amount of output: AFC = TFC/Q. The value of AFC will decline as the quantity produced increases. |
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| Calculated by dividing total variable cost by the amount of output: AVC = TVC/Q. The value of AVC will decrease, reach a minimum, and then increase. |
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| Found by dividing the total cost by output or by adding the average fixed cost with average variable cost at that level of output: ATC = TC/Q or ATC = AFC + AVC. |
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| The additional cost of producing one more unit of output that can be calculated by noting the change in total cost divided by the change in quantity. Marginal cost curve interests the ATC and AVC curves at their lowest points. When MC lies above the ATC, ATC will rise. A CHANGE IN FIXED COSTS WILL AFFECT ATC AND AFC, AND A CHANGE IN VARIABLE COSTS WILL AFFECT MC, AVC, AND ATC. |
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| Comprised of segments of the short run ATC curves for the various plant sizes that can be constructed which shows the lowest ATC at which any output level can be produced if given ample time. Smallest plant size is ATC-1 and largest plant size is ATC-7. Parabolic shape of ATC curve is caused by economies and diseconomies of scale. |
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| A number of factors including labor specialization, managerial specialization, and efficient capital that will for a time lead to lower average costs of production, accounting for the downsloping part of the long-run ATC curve. |
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| The increase in ATC that occurs after a time of expansion due to the difficulty of efficiently controlling and coordinating a firm's operations as it becomes a large-scale producer, accounting for rising portion of planning curve |
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| The firm's long-running ATC curve which each of the short-run ATC curves touches. |
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Term
| Constant Returns to Scale |
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Definition
| A range over which the long-run ATC does not change and over which the output does not constitute an economies nor diseconomies of scale as the input is directly proportional to the output. |
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| The lowest level of output at which a firm can minimize long-run average costs. Wide range of constant returns enables small and large firms alike to be successful in the industry. Economies of scale over a wide range and diseconomies of scale at only high outputs occur in heavy industries. |
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| Relatively rare market situation in which ATC is minized when only one firm produces a particular good or service (economies of scale extend beyond market size). |
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| Involves a very large number of firms producing a standardized product that makes it very easy for firms to enter and exit the industry. |
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| Market structure in which one firm is the sole seller of a single unique product which constitutes the entire industry. |
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| Characterized by a relatively large number of sellers producing differentiated products and an easy entry or exit into industry. |
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| Selling strategy in which a firm does not try to distinguish product on the basis of price. |
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| Selling approach in which producers promote product on attributes such as design and workmanship. |
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| Involves only a few sellers of a standard or differentiated product so each firm is affected by the decisions of its rivals so they must take these factors into consideration when determining their own price and output. |
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| Individual firms cannot change market price, but can only adjust to it since a single firm's modified output will not affect the supply or price unless all firms act in a concerted effort. |
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| The revenue per-unit received by the seller such that price and average revenue are identical. |
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| Found by multiplying price by the corresponding quantity that the firm can sell (each unit sold adds exactly its constant price to total revenue). |
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| The change in total revenue that results from selling one more unit of output. In pure competition, the marginal revenue always equals the price. |
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| An output at which a firm makes a normal profit but no economic profit as total revenue exactly equals total cost. Any point between the two break-even points will yield an economic profit. |
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| Marginal Revenue-Marginal Cost Rule |
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Definition
| States that in the short-run, the firm will maximize profit or minimize loss by producing the output at which marginal revenue equals marginal cost (as long as production is preferrable to shutting down). |
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| Every unit up to and including that which MR>MC is produced so that profit yielded is greatest. |
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| MR = MC rule is still obeyed and despite economic losses incurred, firm reamins open as loss does not exceed fixed cost of closing. |
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| MC>MC at every possible output level and smallest loss firm can incur exceeds the fixed cost of remaining in operation, therefore the firm shuts down. |
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| The solid portion of the firm's marginal cost curve lying above its average variable cost curve that tells the amount of output the firm will supply at each price. See the corresponding graph in notebook. |
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| Supply curve that describes the response of the quantity supplied to a change in price after all possible adjustments have been made. Also considers the effect, if any, that the number of firms in the market has on the costs of individual firms. |
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Definition
| Industry expansion or contraction will not affect resource prices and therefore production costs. The entry/exit of firms does not shift the long run ATC curve of any existing firm. Long-run supply curve is perfectly elastic (horizontal in nature) due to price return regardless of number of firms. |
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Definition
| Constitute most industries in that firms' ATC curves shift upward as the industry expands and downward as the industry contracts. Economic profits are curbed by both firm entry into industry and shift of ATC curve upward (output increases due to higher equilibrium price), and economic losses are curtailed by both firm exit and downward shift of ATC curve (output decreases due to lower equilibrium price). Long-run supply curve is upsloping as a result. |
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Definition
| Firms that experience lower costs of production as the industry expands and higher costs as the industry contracts. Decreases in the price of resources needed in assembly greater reduce cost of production for firms, increasing the supply, decreasing ATC, and decreasing equilibrium price. Exit of firms decreases supply, increases ATC, and increases equilibrium price. Long-run supply curve is downsloping. |
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| Requires that goods be produced in the least-costly manner otherwise the firm will not survive due to the economic losses incurred. Graphically, achieved when the price of product intersects the ATC curve at is lowest point. |
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| Long-run equilibrium ensures that society's scarce resources are directed towards porducing goods that people most want to consume. Graphically depicted when the price (marginal revenue) intersects the MC curve. |
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| Concept that the creation of new products and production methods destroys the market position of firms committed to existing products and old ways of business. |
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| Market condition in which a firm is the sole producer of a product for which there are no substitutes. Characterized by the following attributes: single seller, firm and industry are synonymous, no close substitutes for the goods produced, blocked entry impedes competition, nonprice competition, and price maker. |
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| Pure monopolist controls quantity supplied and thus has considerable control over price. Changes in demand prompt monopoly to manipulate prices. |
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| The factors that prohibit firms from entering an industry, the strength of which determine the tye of market structure that exists. Teh following are barriers to entry: economies of scale, legal barriers, control of essential resources, and pricing/strategic maneuvers. |
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| Occurs when market demand curve intersects at the declining part of the long-run ATC curve as they can then set very high prices. Additional firms will not enter the industry as the monopoly can produce the goods for the lowest possible costs. |
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| Exclusive right of an inventor to use or allow others to use his or her invention, preventing rivals from benefiting without having incurred expenses. Enables monopoly power to be achieved as the life of the 20 year patent provides revenues for other patentable innovations. |
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| Manner by which government limits entry into an industry so that monopolistic firms can generate economic profit. |
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| Marginal Revenue-Marginal Cost Rule |
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Definition
| Rule that monopolies also follow in that when production is preferrable to shutting down, the monopolist will produce up to the output where the marginal revenue and marginal cost curves intersect. However, the price charged will be equivalent to the demand curve's willingness of consumers to pay. |
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Definition
| Phenomenon of monopolies in which income from cosnumers transfers to monopolies as increased revenue because it can charge higher prices than its competitive counterparts, generating substantial profits that can persist in the long-run. Graphically represented by a reduction in the size of the consumer surplus. |
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| A product's ability to satisfy a large number of consumers at the same time due to the singular productino need and then low marginal cost of distribution (ex. dell computers must be manufactured for each person desiring one, but Microsoft computer software must only be developed once and then distributed). Graphically represented by lowered ATC as the number of consumers increases. |
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Definition
| Occur when the value of a product to each user, including existing users, increases as the total number of users increases. The greater the number of persons connected to the system, the more benefits to each person are received. |
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| Occurs when a firm produces output at a higher production cost than is necessary, lying above the ATC curve for a given output level. Monopolies are more likely to result in this type of inefficiency than competitive firms because there is simply no incentive to constantly make attempts at lowering cost of production. |
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| Any activity designed to transfer income or wealth to a particular firm ro resource supplier at someone else's (or society's) expense. |
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| The practice of selling a good at more than one price when the price differences are not justified by changes in production costs, resulting in increased profit for the monopolist. There are three manners in which price discrimination can occur: (1) Each customer in the market is charged the highest price he or she is willing to pay, (2) Each customer is charged one price for the first unit and a lower price for subsequent units, or (3) some customers are charged one price and other customers another price. |
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| A requisite condition for price discrimination that the seller must be a monopolist or a firm with the ability to control both output and price. |
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| A requisite condition for price discrimination in that the seller must be able to segregate buyers into distinct classes based upon their willingness to pay. |
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| Third requisite condition for price discrimination that the original buyer of the product cannot resell it as the resale would create competition with the monopoly. (Those who obtained the good cheaply could sell to those being charged higher prices by the monoply). |
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| The regulated price that achieves allocative efficiency because MR curve becomes horizontal and equal to new price curve, allowing intersection of P(MR)=MC to dictate output that is actually demanded by society. However, this regulating technique can result in a regulated price that is below the ATC, making the monopoly incur economic losses in the short run and forcing closure in the long run. |
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Definition
| The regulated price that is high enough for monopolists to earn a normal profit and remain in busines, which is determined by the intersection of the ATC and demand curves. Results in change of monopoly's MR curve to a horizontal line at the fair-price that always lies above the MC curve, ensuring that the monopoly does not incur costs in the short run, nor do they have incentive to close in the long run. |
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Definition
| Recognition that implementing the socially optimal price in a monopoly (P=MC) will likely result in short-run losses and long-run closures, yet that establishing a fair-return price (P=ATC) will allow monopolists to cover costs and only partially resolve the underallocation of resources. Regulation of monopolies appeases society but leads to X-inefficiency because the monopoly has no incentive to lower cost of production since regulation commission will simply raise the fair-price return amount. |
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Definition
| Economic market structure that represents widespread industry in that it is a combintion of a small amount of monopoly power with a large amount of competition. Characteristics include: relatively large number of sellers, differentiated products, easy exit and entry, and advertising. |
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| Products that are produced wtih several variations ranging from differences in physical characteristics to location to costumer service. Typically uses brand names, trademarks, or celebrity connections to promote the good or service. |
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| Product promotion on the basis of attributes that seeks to make price less of a factor. |
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Term
| Four-Firm Concentration Ratio |
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Definition
| The ratio of the output (sales) of the four largest firms in an industry relative to total industry sales, expressed as a percentage. Low ratios indicte pure competition, fairly high ratios indicate monopolistic competition, and very high ratios indicate oligopoly (above 40%). |
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| The sum of the squared percentage market shares of all firms in the industry that purposely gives much greater weight to larger firms than small firms. Approaches zero for pure competition given miniscule market shares, equals 10,000 when industry is a monopoly, and lower values indicate monopolistic competition over oligopoly. |
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| The gap between the minimum ATC output and profit-maximizing output that results from plant and equipment underutilization. |
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Definition
| Market structure dominated by a few large producers of a homogeneous or differentiated product that allows each firm to exert considerable control over prices and take into account the reaction its rivals to pricing, output, and advertising. Attributes include: few large producers, strategic behavior, muutual interdependence, many barriers to entry, and possibility of mergers. |
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Definition
| Firms in the oligopoly produce standardized goods (examples: steel, copper, zinc industries). |
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| Firms in the oligopoly that produce differentiated goods and market them on the basis of nonprice competition (examples: automobile and tire industry). |
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| Self-interested behavior that takes into consideration the reactions of other oligopolistic firms. |
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| Situation in whcih each firm's profit depends not only upon its own strategies but also on those of other firms' in determining both price and output. |
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| Interindustry Competition |
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Definition
| Competition between two goods associated with different industries that causes concentration ratios to actually understate the competition. |
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Definition
| Concentration ratios are specific to only domestic inductries and their products, and as such may overstate the concentration since foreign competition is not considered. |
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Definition
| The study of how people (oligopolists) behave in strategic situations by patterning their actions according to the actions and expected reactions of rivals. |
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Definition
| Tabular presentation of the various pricing strategy combinations that shows the payoff to each firm that would result from each strategy. Each oligopolist's profit depends upon its own pricing and output decisions as well as those of its rivals. |
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Definition
| An option for each firm that does better than any alternative option regardless of what the other firm does. |
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Definition
| Regardless of what other players do, the strategy yields a smaller payoff than some other strategy. It is always better to play some other strategy. |
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Definition
| The outcome of the two dominant strategies in which neither rival wants to deviate. Both rivals see their current strategy as optimal given the firm's strategic choice. It is the only outcome in the payoff matrix that, once achieved, is stable and will therefore persist. |
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Definition
| Cooperation of rivals that is mutually beneficial so that outcome of dominated strategy does not occur. |
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Definition
| Maintains that a firm's decrease in price will prompt other oligopolists to reduce prices in order to prevent price cutter from taking customers, but will ignore price increases because they will gain business from price raiser. |
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| Successive and continuous rounds of price cuts by rivals during unstable macroeconomic times that attempt to maintain their market shares. |
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| Holds that oligopolistic firms with highly similar demand and cost conditions can collude to limit their joint output and set a single, common price which basically enables each firm to act as a pure monopolistic and obtain each oligopolist's maximum profit. |
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Definition
| Most comprehensive form of collusion that consists of a group of producers which creates a formal written agreement specificying the output and price of each member. |
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| Implicit understanding by which oligopolists coordinate prices without engaging in outright collusion that involves the "dominant" firm in an industry to iniate price changes that all other firms automatically follow. |
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| Practice by which the dominant firm fails to set price at a level that creates economic profit for the purpose of discouraging other competitive firms from entering the industry. |
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