Dr. Erhardt Mirco Exam 2

the law of diminishing rate of substitution

...States that as your consumption of "A" increases, the amount of "B" you are willing to give up to get another "A" declines.

properties of isoquants

1. isoquants farther from the origin represent greater output rates. 2. isoquants have negative slopes because along a given isoquant, the quantity of labor employed inversely relates to the quantity of capital employed. 3. isoquants do not intersect because each isoquant refers to a specific rate of output. 4. isoquants are usually convex to the origin.

product differentiation

1. physical differences (color, weight, etc) 2. location (spatial differentiation, price/convenient stores) 3. services (free delivery, guarantees, toll free numbers) 4. product image (endorsements, all natural, starbucks, image/brand etc)

price leader

a company that sets the price for the industry.

constant long-run average cost

a cost that occurs when, over some range of output, long run average cost neither increases nor decreases with changes in firm size. [billions and billions of burgers]

long-run average cost curve

a curve that indicates the lowest average cost of production at each rate of output when the size, or scale, of the firm varies; also called the planning curve.

short-run industry supply curve

a curve that indicates the quantity supplied by the industry at each price in the short run; in perfect competition, the horizontal sum of each firm's short-run supply curve.

isoquant curve

a curve that shows all the technologically efficient combinations of two resources, such as labor and capital, that produce a certain rate of output.

short-run firm supply curve

a curve that shows the quantity a firm supplies at each price in the short run; in perfect competition, that portion of a firm's marginal cost curve that intersects and rises above the low point on its average variable cost curve.

long-run industry supply curve

a curve that shows the relationship between price and quantity supplied by the industry once firms adjust fully to any change in market demand.

price taker

a firm that faces a given market price and whose quantity supplied has no effect on that price; a perfectly competitive firm.

price maker

a firm that must find the profit maximizing price when the demand curve for its output slopes downward. [graph: monopoly]

implicit cost

a firm's opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment. (stuff the company already owns)

economic profit

a firm's total revenue minus its explicit cost and implicit costs.

accounting profit

a firm's total revenue minus its explicit costs. (For example, if you invest $100,000 to start a business and earned $120,000 in profit, your _______ would be $20,000.)

Indifference map

a graphical representation of a consumer's tastes. Each curve reflects a different level of utility.

patent

a legal barrier to entry that grants its holder the exclusive right to sell a product for 20 years from the date the patent application is filed. [pharmaceuticals]

oligopoly

a market structure characterized by a few firms whose behavior is interdependent.

monopolistic competition

a market structure with many firms selling products that are substitutes but different enough that each firm's demand curve slopes downward; firm entry is relatively easy. - these types of firms are price makers - barrier to entry is low - but there are enough sellers that they behave competitively - they can act independently or interdependently

perfect competition

a market structure with many fully informed buyers and sellers of a standardized product and no obstacles to entry or exit of firms in the long run.

perfectly discriminating monopolist

a monopolist who charges a different price for each unit sold; also called the monopolist's dream.

long run

a period during which all resources under the firm's control are variable.

short run

a period during which at least one of a firm's resource is fixed.

commodity

a standardized product, a product that does not differ across producers, such as bushes of wheat or an ounce of gold.

rent seeking

activities undertaken by individuals or firms to influence public policy in a way that will increase their incomes.

collusion

agreement among firms to increase economic profit by dividing the market and fixing the price.

constant-cost industry

an industry that can expand or contract without affecting the long run per-unit cost of production; the long-run industry supply curve is horizontal.

increasing-cost industry

an industry that faces higher per-unit production costs as industry output expands in the long run; the long run industry supply curve slopes upward.

undifferentiated oligopoly

an oligopoly that sells a commodity or a product that does not differ across suppliers, such as an ingot of steel or a barrel of oil.

differentiated oligopoly

an oligopoly that sells product that differs across suppliers, such as automobiles or breakfast cereal.

barrier to entry

any impediment that prevents new firms from entering an industry and competing on an equal basis with existing firms.

variable cost

any production cost that changes as the rate of output changes.

fixed cost

any production cost that is independent of the firm's rate of output. (rent, advertising, insurance and office supplies, which tend to remain the same regardless of production output.)

variable resources

any resource that CAN be varied in the short run to increase or decrease production. Ex. Human labor - you can lay people off, make them work extra hours etc etc

fixed resources

any resource that CANNOT be varied in the short run.

law of diminishing marginal returns

as more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative.

budget line

depicts all possible combinations of "A" and "B", given their prices and your budget.

diseconomies of scale

forces that may eventually increase a firm's average cost as the scale of operation increases in the long run. [at the movies]

economies of scale

forces that reduce a firm's average cost as the scale of operation increases in the long run. Sometimes a monopoly occurs when a firm experiences __________, as reflected by downward sloping.

cartel

group of firms that agree to coordinate their production and pricing decisions to reap monopoly profit. illegal in the US.

isocost line

identifies all combinations of capital and labor the firm can hire for a given total cost.

production function

identifies the maximum quantities of a particular good or service that can be produced per time period with various combinations of resources, for a given level of technology. [the pf can be presented as an equation, a graph, or a table]

market structure

important features of a market, such as the number of firms, product uniformity across firms, firms' ease of entry and exit, and forms of competition.

price discrimination

increasing profit by charging different groups of consumers' different prices when the price differences are not justified by differences in costs.

deadweight loss of monopoly

net loss to society when a firm uses its market power to restrict output and increase price. [graph: losses from monopoly]

explicit cost

opportunity cost of resources employed by a firm that takes the form of cash payments. ( direct payment made to others in the course of running a business, such as wage, rent and materials)

OPEC

organization petroleum exporting countries.

indifference curve

shows all combinations of goods that provide the consumer with the same satisfaction, or the same utility (the consumer finds all combinations on a curve equally preferred).

normal profit

the accounting profit earned when all resources earn their opportunity cost. (_______ is the minimum level of profit needed for a company to remain competitive in the market.)

marginal product

the change in total product that occurs when the use of a particular resource increases by one unit, all other resources constant. (for instance, the change in output when a firm's labor is increased from five to six units)

marginal revenue

the change in total revenue from selling an additional unit; in perfect competition, _________ is also the market price.

marginal utility

the change in total utility derived from a one-unit change in consumption of a good.

consumer equilibrium

the condition in which an individual consumer's budget is spent and the last dollar spent on each good yields the same marginal utility; therefore, utility is maximized.

excess capacity

the difference between a firm's profit-maximizing quantity and the quantity that minimizes average cost. [in monopolistic competition, firms fall short of producing the quantity that would achieve the lowest average cost, as opposed to perfect competition.

consumer surplus

the difference between the maximum amount that a consumer is willing to pay for a given quantity of a good and what the consumer actually pays. [marginal value of free medical care]

marginal valuation

the dollar value of the marginal utility derived from consuming each additional unit of a good.

expansion path

the line formed by connecting tangency points.

increasing marginal returns

the marginal product of a variable resource increases as each additional unit of that resource is employed.

law of diminishing marginal utility

the more of a good a person consumes per period, the smaller the increase in total utility from consuming one more unit, (o.t.c.).

marginal rate of substitution

the number of "A" you are willing to give up to get more of "B", neither gaining nor losing utility in the process.

innovation

the process of turning an innovation into a marketable product.

marginal rate of technical substitution (MRTS)

the rate at which labor substitutes for capital without affecting output. (is the amount by which the quantity of one input has to be reduced ( ) when one extra unit of another input is used ( ), so that output remains constant ( ))

production function

the relationship between the amount of resources employed and a firm's total product.

total cost

the sum of fixed cost and variable cost, or TC = FC + VC.

total product

the total output produced by a firm.

total utility

the total satisfaction a consumer derives from consumption; it could refer to either the total utility of consuming a particular good or the total utility from all consumption. Ex. go to italian restaurant, the satisfaction from an entire meal or each piece of that meal.

golden rule of profit maximization

to maximize profit or minimize loss, a firm should produce the quantity at which marginal revenue equals marginal cost; this rule holds for all market structures.

average total cost

total cost divided by output, or ATC = TC/q; the sum of average fixed cost and average variable cost, or ATC = AFC + AVC.

average revenue

total revenue divided by output, or AR=TR/q; in all market structures, average revenue equals the market price.

average variable cost

variable cost divided by output, or AVC = VC/q.