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.