Intro to Economics Chapter 10-15 – Flashcards
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firm
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an institution that hires factors of production and organizes those factors to produce and sell goods and services
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economic profit
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total revenue minus total cost (opp. cost of production)
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implicit rental rate
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firm's opportunity cost of using the capital it owns
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economic depreciation
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fall in the market value of a firm's capital over a given period
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normal profit
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profit that an entrepreneur earns on average
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technology
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any method of producing a good or service
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technological efficiency
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firm produces a given output by using the least amount of inputs
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economic efficiency
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firm produces a given output at the least cost
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command system
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method of organizing production that uses a managerial hierarchy
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incentive system
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method of organizing production that use a market-like mechanism inside the firm
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principal-agent problem
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problem of devising compensation rules that induce an agent to act in the best interest of principal
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perfect competition
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market structure in which there are many firms, each selling an identical product, many buyers, and no restrictions on the entry of new firms into the industry
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monopolistic competition
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market structure in which a large number of firms compete by making similar but slightly different products
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product differentiation
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making a product slightly different from the product of a competing firm
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oligopoly
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market structure in which a small number of firms compete
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monopoly
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market structure in which one firm produces a good or service that has no close substitutes and in which there are barriers to enter
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four-firm concentration ratio
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percentage of the value of sales accounted for by the four largest firms in the industry
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Herfindahl-Hirschman Index (HHI)
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square of the percentage market share of each firm summed over the largest 50 firms (or summed over all the firms if there are less than 50)
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transaction costs
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costs that arise from finding someone with whom to do business, of reaching an agreement about the price, other aspects of the exchange, and of ensuring that the terms of the agreement are fulfilled
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economies of scale
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cost of producing a unit of a good falls as its output rate increases
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economies of scope
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when a firm uses specialized (and often expensive) resources to produce a range of goods and services
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short run
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time frame in which the quantity of at least one factor of production is fixed (usually labor is variable)
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long run
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time frame in which the quantities of all factors of production can be varied
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sunk cost
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past expenditure on a plant that has no resale value
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total product
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maximum output that a given quantity of labor can produce
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marginal product
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increase in total product that results from a one-unit increase in the quantity of labor employed
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average product
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total product divided by quantity of product
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diminishing marginal returns
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marginal product of an additional worker is less than the marginal product of the previous worker
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law of diminishing returns
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as a firm uses more of a variable factor of production with a given quantity of the fixed factor of production, with the marginal product of the variable factor eventually diminishes
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total cost
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cost of all of the factors of production a firm uses
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total fixed cost
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the cost of the firm's fixed factors
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total variable cost
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cost of the firm's variable factors
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marginal cost
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increase in total cost that results from a one-unit increase in output
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average fixed cost (AFC)
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total fixed cost per unit of output
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average variable cost (AVC)
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total variable cost per unit of output
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average total cost (ATC)
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total cost per unit of output
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long-run average cost curve
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relationship between the lowest attainable average total cost and output when the firm can change both the plant it uses and the quantity of labor it employs
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economies of scale
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features of a firm's technology that make ATC fall as output increases
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diseconomies of scale
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features of a firm's technology that make ATC rise as output increases
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minimum efficient scale
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smallest output at which long-run average cost reaches its lowest level
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perfect competition
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a market in which many firms sell identical products to many buyers, there are no restrictions on entry into the market, established firms have no advantage over new ones, and sellers/buyers are well informed about prices
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price taker
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firm that cannot influence the market price because its production is an insignificant part of the total market
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total revenue
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price of its output multiplied by the number of units of output sold (p*q)
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marginal revenue
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change in total revenue that results from a one-unit increase in quantity sold
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shutdown point
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price and quantity at which it is indifferent between producing and shutting down
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short-run market supply curve
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curve that shows the quantity supplied by all the firms in the market at each price when each firm's plant and the number of firms remain the same
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external economies
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factor beyond the control of an individual firm that lower the firm's costs as the market output increases
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external diseconomies
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factors outside the control of a firm that raise the firm's costs as the market output increases
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long-run market supply curve
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curve shows how the quantity supplied in a market varies as the market price varies after all the possible adjustments have been made, including changes in each firm's plant and the number of firms in the market
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monopoly
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market with a single firm that produces a good or service for which no close substitute exists and that is protected by a barrier that prevents other firms from selling that good or service
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barrier to enter
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constraint that protects a firm from potential competitors
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natural monopoly
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a market in which economies of scale enable one firm to supply the entire market at the lowest possible cost
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legal monopoly
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a market in which competition and entry are restricted by the granting of a public franchise, gov't license, patent, or copyright
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single-price monopoly
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firm that must sell each unit of its output for the same price to all its customers
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price discrimination
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when a firm sells different units of a good or service for different prices
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economic rent
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any surplus- consumer surplus, producer surplus, or economic profit
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rent seeking
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pursuit of wealth by capturing economic rent
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perfect price discrimination
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when a firm is able to sell each unit of output for the highest price anyone is willing to pay for it
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regulation
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rules administered by a government agency to influence prices, quantities, entry, and other aspects of economic activity in a firm or industry
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deregulation
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process of removing regulations
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social interest theory
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political and regulatory process relentlessly seeks out inefficiency and introduces regulation that eliminates dead weight loss and allocates resources efficiency
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capture theory
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regulation serves the self interest of the producer, who captures the regulator and maximizes economic profit
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marginal cost pricing rule
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being regulated to set its price equal to marginal cost
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average cost pricing rule
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sets price equal to average total cost
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rate of return regulation
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firm must justify its price by showing that its return on capital doesn't exceed a specified target rate
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price cap regulation
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a price ceiling- a rule that specifies the highest price a firm is permitted to set
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monopolistic competition
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market structure in which a large number of firms compete, each firm produces a differentiated product, firms compete on quality, price, and marketing, and firms are free to enter and exit the industry
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excess capacity
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when a firm produces below its efficient scale
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efficient scale
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the quantity at which ATC is at its minimum
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markup
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the amount by which price exceeds marginal cost
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signal
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an action taken by an informed person (or firm) to send a message to uninformed people
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oligopoly
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a market structure in which natural or legal barriers prevent the entry of new firms and a small numbers of firms compete
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duopoly
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an oligopoly market with two firms
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cartel
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group of firms acting together, colluding, to limit output, raise price, and increase economic profit
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game theory
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set of tools for studying strategic behavior , behavior that takes into account the expected behavior of others and the recognition of mutual interdependence
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strategies
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all the possible actions of each player
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payoff matrix
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table that shows the payoffs for every possible action by each player for every possible action by each other player
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Nash equilibrium
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player A takes the best possible action given the action of player B and player B takes the best possible action given the action of player A
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dominant-strategy equilibrium
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an equilibrium in which the best strategy of each player is to cheat (confess) regardless of the strategy of the other player
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collusive agreement
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an agreement between two or more producers to form a cartel to restrict output, raise the price, and increase profits
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cooperative equilibrium
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an equilibrium in which the players make and share the monopoly profit is possible
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contestable market
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a market in which firms can enter and leave so easily that firms in the market face competition from potential entrants
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limit pricing
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sets the price at the highest level that inflicts a loss on the entrant
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antitrust law
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law that regulates oligopolies and prevents them from becoming monopolies/behaving like monopolies
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resale price maintenance
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when a distributor agrees with a manufacturer to resell a product at or above a specific minimum price
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tying arangement
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agreement to sell one product only if the buyer agrees to buy another, different product
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predatory pricing
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setting a low price to drive competitors out of business with the intention of setting a monopoly price when the competition has gone
