Econ Test 2

Total Product

A firm's total output

Social Welfare

Overall well-being of people in the economy, maximized when the marginal cost of production equals the marginal benefit to consumers.

Elastic Supply

Price change has a relatively large effect on quantity supplied, the percentage change in quantity supplied exceeds the percentage change in price, the price elasticity of supply exceeds 1.0.

Inelastic Supply

Price change has relatively little effect on quantity supplied, the percentage change in quantity supplied is less than the average percentage change in price, the price elasticity of supply is less than 1.0.

Total Revene

Price multiplied by quantity demanded at that price

Price Taker

A firm that faces a given market price and whose quantity supplied has no effect competitive firm that decides to t produce must accept, or 'take' the market price.

Accounting Profit

A firm's total revenue minus its explicit costs.

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.

Short-Run Supply Curve

Curve that shows how much 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 about the low point on its average variable cost curve.

Long-Run Industry Supply Curve

Curve that shows the relationship between price and quantity supplied by the industry once firms adjust in the long-run to any change in market demand.

Commodity

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

Linear Demand Curve

Straight-line demand curve, such a demand curve has a constant slope but usually has a varying price elasticity.

Total Cost

Sum of fixed cost and variable cost, TC=FC+VC

Total Revenue Equation

TR= P times Q

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.

Price Elasticity of Demand Equation

Percentage change in quantity demanded Percentage change in price

Production function

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

Average Revenue (AR)

Total revenue divided by quantity, or AR= TR/ quantity, in all market structures, average revenue equals the market price.

Elastic Demand

A change in price has relatively large effect on quantity demanded, the percentage change in quantity demanded exceeds the percentage change in price, resulting price elasticity has an absolute value exceeding 1.0

Inelastic Demand

A change in price has relatively little effect on quantity change in quantity demanded is less than the percentage change in price, resulting in price elasticity has an absolute value less of 1.0.

Normal Profits

Accounting profit earned when all resources earn their opportunity cost, equal to implicit cost.

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.

Variable Resource

Any resource that can be varied in the short run to increase or decrease production.

Fixed Resource

Any resource that cannot be varied in the short run.

Producer Surplus

Bonus for producers in the short-run, amount by which total revenue from production exceeds variable costs.

Productive Efficiency

Condition that exists when production uses the least-cost combination of inputs, minimum average cost in the long-run.

Allocative Efficincy

Condition that exists where firms produce the output preferred by consumers, marginal benefit equals marginal cost.

Constant Long-Run Average Cost

Condition that occurs if, over some range of output, long-run average cost neither increases nor decreases with changes in firm size.

Long-Run Average Cost Curve

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

Curve that indicates the quantitiy 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.

Unit- Elastic Demand Curve

Everywhere along the demand curve, the percentage change in price causes an equal but offsetting percentage change in quantity demanded, so total revenue remains the same, the elasticity has an absolute value of 1.0.

Implicit Cost

Firm's opportunity cost using its own resources without a corresponding cash payment.

Economic Profits

Firm's total revenue minus its explicit and implicit costs.

Diseconomies of Scale

Forces that may eventually increase a firm's average cost as the scale of operation increases in long run.

Economies of Scale

Forces that reduce a firm's average cost as the scale of operation increases in the long run.

Perfectly Elastic Supply Curve

Horizontal line reflecting a situation in which any price decrease drops the quantity supplied to zero, the elasticity value is infinity.

Perfectly Elastic Demand Curve

Horizontal line reflecting a situation in which any price increase would reduce quantity demanded to zero, elasticity has an absolute value of infinity.

Market Sturcture

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

Constant- Cost Industry

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

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

Minimum Efficient Scale

Lowest rate of output at which a firm takes full advantage of economies of scale.

Increasing Marginal Returns

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

Price Elasticity of Demand

Measures how responsive quantity demanded to a price change, the percentage change in quantity demanded divided by the percentage change in price.

Price Elasticity of Supply

Measures the responsiveness of quantity supplied to a price change, the percentage change in quantity supplied diveded by the percentage change in price.

Law of Diminishing Marginal Returns

More of a variable resource is added to a given amount of other resources, marginal product eventually declines and could become negative.

Explicit Cost

Opportunity costs of resources employed by a firm that takes the form of cash payments.

Long Run

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

Marginal Product

The change in a total product that occurs when the use of a particular resource increases by one unit, all other resources constant.

Marginal Cost

The change in total cost resulting from a one-unit change in output, the change in total cost divided by the change in output. MC=change TC/ change quantity

Marginal Revenue (MR)

The firm's change in total revenue from selling an additional unit a perfectly competitive firm's marginal revenue is also the market price.

Income Elasticity of Demand

The percentage change in demand divided by the percentage change in consumer income, the value is positive for normal goods and negative for inferior goods.

Unit-Elastic

The percentage change in the quantity demanded equals the percentage change in price, the resulting price elasticity has an absolute value of 1.0.

Average Total Cost

Total cost divided by output, or ATC= TC/quantity, sum of average fixed cost and average variable cost or, ATC= AFC=AVC

Constant- Elasticity Demand Curve

Type of demand that exists when price elasticity is the same everywhere along the curve, elasticity value is unchanged.

Average Variable cost

Variable cost divided by output, or AVC= VC/quanity

Perfectly Inelastic Supply Curve

Vertical Line reflecting a situation in which a price change has no effect on the quantity supplied, the elasticity value is zero.

Perfectly Inelastic Demand Curve

Vertical line reflecting a situation in which any price change has no effect on the elasticity value is zero.

Unit- Elastic Supply Curve

Percentage change in price causes an identical percentage change in quantity supplied, depicted by a supply curve that is a straight line from the origin, the elasticity value equals 1.0.

Price Elasticity Formula

Percentage change in quantity demanded divided by the percentage change in price, the average quantity and the average price are used as bases for computing percentage changes in quantity and in price.

Unit- Elasticity Supply

Percentage change in quantity supplied equals the percentage change in price, price elasticity of supply equals 1.0.

Cross- Price Elasticity of Demand

Percentage change in the demand of one good divided by the percentage change in the price of another good, its positive for substitutes negative for complements, and zero for unrelated goods.

Short Run

Period during which at least one of a firm's resources is fixed.