Chapter 22

Price Taker

A competitive firm that must take the price of its product as given because the firm cannot influence its price

Perfectly Competitive Firm

A firm that is such a small part of the total industry that it cannot affect the price of the product or service that it sells

Price Searcher

A firm that must determine the price-output combination that maximizes profit because it faces a downward-sloping demand curve

Perfect Competition

A market structure in which the decisions of individual buyers and sellers have no effect on market price

Long-Run Industry Supply Curve

A market supply curve showing the relationship between prices and quantities after firms have been allowed time to enter or exit from an industry, depending on whether there have been positive or negative economic profits

Natural Monopoly

A monopoly that arises from the peculiar production characteristics in an industry It usually arises when there are large economies of scale One firm can produce at a lower average cost than can be achieved by multiple firms

Monopolist

A single supplier of a good or service for which there is no close substitute The monopolist therefore constitutes the entire industry

Market Failure

A situation in which an unrestrained market operation leads to either too few or too many resources going to a specific economic activity

Marginal Cost Pricing

A system of pricing in which the price charged is equal to the opportunity cost to society of producing one more unit of the good or service in question The opportunity cost is the marginal cost to society.

Short Run

A time period when at least one input, such as plant size, cannot be changed

Marginal Revenue

The change in total revenues divided by the change in output MR= change in TR/Change in Q

Increasing-Cost Industry

An industry in which an increase in industry output is accompanied by an increase in long-run per unit costs Its long-run industry supply curve slopes upward

Decreasing-Cost Industry

An industry in which an increase in industry output leads to a reduction in long-run per-unit costs Its long-run industry supply curve slopes downward.

Constant-Cost Industry

An industry whose total output can be increased without an increase in long-run per-unit costs Its long-run supply curve is horizontal

Question - Output per time period = some function of capital and labor inputs

Answer As long as marginal physical product rises, marginal cost will fall, and when marginal physical product starts to fall (after reaching the point of diminishing marginal product), marginal cost will begin to rise

Question What does the short-run supply curve for the individual firm look like?

Answer The firm's short-run supply curve in a competitive industry is its marginal cost curve at and above the point of intersection with the average variable cost curve

Production

Any activity that results in the conversion of resources into products that can be used in consumption

The Relationship Between Diminishing Marginal Product and Cost Curves (cont'd)

At the point at which diminishing marginal product begins, marginal costs begin to rise as the marginal product of the variable input begins to decline

Fixed Costs

Costs that do not vary with output and are fixed for a certain period of time, rent on a building

Variable Costs

Costs that vary with the rate of production i.e wages paid to workers and purchases of materials

Economies of Scale

Decreases in long-run average costs resulting from increases in output -these economies of scale do not persist indefinitely, however -once long-run average costs rise, the curve begins to slope upward

Price Differentiation

Establishing different prices for similar products to reflect differences in marginal cost in providing those commodities to different groups of buyers

The Relationship Between Diminishing Marginal Product and Cost Curves

Firms' short-run cost curves are a reflection of the law of diminishing marginal product Given any constant price of the variable input, marginal costs decline as long as the marginal product of the variable resource is rising

Marginal Revenue equals

Marginal Cost

Q = ƒ(K,L) Q = output / time periodK = capitalL = labor

Output per time period = some function of capital and labor inputs

TR

P times Q

Signals

Profits and losses act as signals for resources to enter an industry or to leave an industry Compact ways of conveying to economic decision makers information needed to make decisions An effective signal not only conveys information but also provides the incentive to react appropriately

Price Discrimination

Selling a given product at more than one price, with the difference being unrelated to differences in cost

TC

TFC + TVC

Total costs (TC)

TFC + TVC

Tariffs

Taxed or imported goods

Long-Run Average Cost Curve

The locus of points representing the minimum unit cost of producing any given rate of output, given current technology and resource prices

The Industry Supply Curve

The locus of points showing the minimum prices at which given quantities will be forthcoming Also called the market supply curve

Planning Horizon

The long run, during which all inputs are variable

Planning Curve

The long-run average cost curve

Minimum Efficient Scale (MES)

The lowest rate of output per unit time at which long-run average costs for a particular firm at a minimum

Law of Diminishing Marginal Product

The observation that after some point, successive equal sized increases in a variable factor of production, such as labor, added to fixed factors of production, will result in smaller increases in output

Marginal Physical Product

The physical output that is due to the addition of one more unit of a variable factor of production The change in total product occurring when a variable input is increased and all other inputs are held constant

Plant Size

The physical size of the factories that a firm owns and operates to produce its output

Deadweight Loss

The portion of consumer surplus that no one in society is able to obtain in a situation of monopoly No one in society, not even the monopoly, can obtain this deadweight loss

Short-Run Break-Even Price

The price at which a firm's total revenues equal its total costs At the break-even price, the firm is just making a normal rate of return on its capital investment (it's covering its explicit and implicit costs).

Short-Run Shutdown Price

The price that just covers average variable costs It occurs just below the intersection of the marginal cost curve and the average variable cost curve.

Total Revenues

The prices per unit times the total quantity sold The same as total receipts from the sale of output

Profit-Maximizing Rate of Production

The rate of production that maximizes total profits, or the difference between total revenues and total costs Also, the rate of production at which marginal revenue equals marginal cost

Production Function

The relationship between maximum physical output and the quantity of capital and labor used in the production process technological relationship between inputs and output.

Total Costs

The sum of total fixed costs and total variable costs

Long Run

The time period in which all factors of productoin can be varied

Average Physical Product

Total product divided by the variable input

Marginal Cost -the change in total costs due to a one-unit change in production rate

change in total cost divided by change in output

AR = TR divided by Q

equals PQ divided by Q equals P

The monopolist is a

price searcher

The perfect competitor is a

price taker

As long as the price per unit sold exceeds the average variable cost per unit produced,

the earnings of the firm's owners will be higher if it continues to produce in the short run than if it shuts down.

P is determined by

the market in perfect competition

The monopolist faces the industry demand curve because

the monopolist is the entire industry

Q is determined by

the producer to maximize profit

Average Total Costs (ATC)

total costs (TC) divided by output (Q)

Average fixed costs (AFC)

total fixed costs (TFC) divided by output (Q)

Profit pi symbol

total revenue (TR) minus total cost (TC)