Econ 5,6,7,8

a firms total profit =

(p-ATC)xQ

invisible hand theory

Adam Smith's theory that the actions of independent, self-interested buyers and sellers will often result in the most efficient allocation of resources

factor of production

An input used in the production of a good or service

explicit costs

The actual payments a firm makes to its factors of production and other suppliers.

perfectly discriminating monopolist

a firm that charges each buyer exactly his or her reservation price

imperfectly competitive firm (or price setter)

a firm that has at least some control over the market price of its product

price taker

a firm that has no influence over the price at which it sells its product

profit maximizing firm

a firm whose primary goal is to maximize the difference between its total revenues and total costs

profitable firm

a firm whose total revenue exceeds its total cost

market power

a firm's ability to raise the price of a good without losing all its sales

perfectly competitive market

a market in which no individual supplier has significant influence on the market price of the product

cost-plus regulation

a method of regulation under which the regulated firm is permitted to charge prices that cover explicit costs of production plus a markup to cover the opportunity cost of resources provided by the firm's owners

natural monopoly

a monopoly that results from economies of scale (increasing returns to scale)

long run

a period of time of sufficient length that all the firms factors of production are variable

short run

a period of time sufficiently short that at least some of the firms factors and production are fixed

constant returns to scale

a production process is said to have constant returns to scale if, when all inputs are changed by a given proportion, output changes by the same proportion

increasing returns to scale (or economies of scale)

a production process is said to have increasing returns to scale if, when all inputs are changed by a given proportion, output changes by more than that proportion

law of diminishing returns

a property of the relationship between the amount of a good or service produced and the amount of a variable factor required to produce it; the law says that when some factors of production are fixed, increased production of the good eventually requires ever-larger increases in the variable factor

efficient (or Pareto efficient)

a situation is efficient if no change is possible that will help some people without harming others

perfect hurdle

a threshold that completely segregates buyers whose reservation prices lie above it from others whose reservation prices lie below it, imposing no cost on those who jump the hurdle

economic loss

an economic profit that is less than zero

monopolistic competition

an industry structure in which a large number of firms produce slightly differentiated products that are reasonably close substitutes for one another

oligopoly

an industry structure in which a small number of large firms produce products that are either close or perfect substitutes

variable factor of production

an input whose quantity can be altered in the short run

fixed factor of production

an input whose quantity cannot be altered in the short run

barrier to entry

any force that prevents firms from entering a new market

allocative function of price

changes in prices direct resources away from overcrowded markets and toward markets that are underserved

rationing function of price

changes in prices distribute scarce goods to those consumers who value them most highly

Marginal cost eventually increases because of _____.

diminishing returns (Reason: Diminishing returns implies that it takes more of the variable input to produce each additional unit of output, which, in turn, implies that marginal cost is increasing.)

One implication of the shape of the demand curve facing a perfectly competitive firm is that:

if the firm increases its price above the market price, it will earn zero revenue

which of the following is most likely to be a variable factor of production at a university? number of librarians size of football stadium size of student union location of university

number of librarians

law of demand

people do less of what they want to do as the cost of doing it rises

if the market for butter is perfectly competitive, then the demand curve facing a firm that produces butter will be

perfectly elastic

at each point along a market supply curve, _____ meausres sellers marginal cost of production

price

which of the following is the most likely to be a fixed factor of production at a pizza restaurant? the number of waiters the size of seating area the amount of pizza dough the amount of electricity

size of seating area

rational spending rule

spending should be allocated across goods so that the marginal utility per dollar is the same for each good

economic rent

that part of the payment for a factor of production that exceeds the owner's reservation price, the price below which the owner would not supply the factor

nominal price

the absolute price of a good in dollar items

marginal utility

the additional utility gained from consuming an additional unit of a good

optimal combination of goods

the affordable combination that yields the highest total utility

producer surplus

the amount by which price exceeds the sellers reservation price

marginal revenue

the change in a firm's total revenue that results from a one-unit change in output

consumer surplus

the difference between a buyers reservation price for a product and the price actually paid.

accounting profit

the difference between a firms total revenue and its explicit costs

economic profit (or excess profit)

the difference between a firms total revenue and the sum of its explicit and implicit costs

real price

the dollar price of a good to the average dollar price of all other goods

marginal cost

the increase in total cost that results from carrying out one additional unit of an activity

deadweight loss

the loss of consumer and producer surplus caused by disparity between price and marginal cost

pure monopoly

the only supplier of a unique product with no close substitutes

normal profit

the opportunity cost of the resources supplied by a firm's owners, equal to accounting profit minus economic profit opp cost = ac profit - ac profit

implicit costs

the opportunity costs of the resources supplied by the firm's owners

hurdle method of price discrimination

the practice by which a seller offers a discount to all buyers who overcome some obstacle

price discrimination

the practice of charging different buyers different prices for essentially the same good or service

total cost

the sum of all payments made to the firms fixed and variable factors of production

fixed cost

the sum of all payments made to the firms fixed factors of production

variable cost

the sum of all payments made to the firms variable factors of production

law of diminishing marginal utility

the tendency for the additional utility gained from consuming an additional unit of a good to diminish as consumption increases beyond some point

profit

the total revenue a firm recieves from the sale of its product minus all costs--explicit and implicit-- incurred in producing it

average total cost (ATC)

total cost / total output

average variable cost (AVC)

variable cost / total output