Chp 12,13, 14

Front 1

A production function

Back 1

the relationship between the quantity of inputs a firm uses and the quantity of output it produces.

Front 2

A fixed input

Back 2

is an input whose quantity is fixed for a period of time and cannot be varied

Front 3

A variable input

Back 3

an input whose quantity the firm can vary at any time

Front 4

long run

Back 4

the time period in which all inputs can be varied.

Front 5

short run

Back 5

the time period in which at least one input is fixed

Front 6

total product curve

Back 6

shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input

Front 7

marginal product

Back 7

input is the additional quantity of output that is produced by using one more unit of that input.

Front 8

diminishing returns to an input

Back 8

when an increase in the quantity of that input, leads to a decline in the marginal product of that input.

Front 9

fixed cost

Back 9

cost that does not depend on the quantity of output produced. It is the cost of the fixed input.

Front 10

variable cost

Back 10

is a cost that depends on the quantity of output produced. It is the cost of the variable input.

Front 11

total cost

Back 11

TC = FC + VC

Front 12

U-shaped average

Back 12

total cost curve falls at low levels of output, then rises at higher levels.

Front 13

Average variable cost

Back 13

is the variable cost per unit of output. AVC = VC/Q= (Variable Cost) / (Quantity of Output)

Front 14

The spreading effect

Back 14

the larger the output, the greater the quantity of output over which fixed cost is spread, leading to lower the average fixed cost.

Front 15

The diminishing returns effect

Back 15

the larger the output, the greater the amount of variable input required to produce additional units leading to higher average variable cost.

Front 16

Note that:

Back 16

Marginal cost is upward sloping due to diminishing returns.
Average variable cost also is upward sloping but is flatter than the marginal cost curve.
Average fixed cost is downward sloping because of the spreading effect.
The marginal cost curve intersects the average total cost curve from below, crossing it at its lowest point. This last feature is our next subject of study

Front 17

long-run average total cost curve

Back 17

shows the relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output.

Front 18

price-taking producer and price-taking consumer

Back 18

is a producer whose actions have no effect on the market price of the good it sells.

is a consumer whose actions have no effect on the market price of the good he or she buys.

Front 19

perfectly competitive market andperfectly competitive industry

Back 19

is a market in which all market participants are price-takers
is an industry in which producers are price-takers.

Front 20

Two Necessary Conditions for Perfect Competition

Back 20

1.must contain many producers, none of whom have a large market share.
2.consumers regard the products of all producers as equivalent.

Front 21

free entry and exit

Back 21

when new producers can easily enter into or leave that industry

Front 22

Marginal revenue

Back 22

is the change in total revenue generated by an additional unit of output

Front 23

optimal output rule

Back 23

says that profit is maximized by producing the quantity of output at which the marginal cost of the last unit produced is equal to its marginal revenue.

Front 24

When a firm is profitable:

Back 24

If TR > TC, the firm is profitable If TR = TC, the firm breaks even.

If TR < TC, the firm incurs a loss.

Front 25

break-even price

Back 25

firm is the market price at which it earns zero profits.

Front 26

short-run market equilibrium

Back 26

when the quantity supplied equals the quantity demanded, taking the number of producers as given.

Front 27

long-run market equilibrium

Back 27

quantity supplied equals the quantity demanded, given that sufficient time has elapsed for entry into and exit from the industry to occur

Front 28

monopolist

Back 28

a firm that is the only producer of a good that has no close substitutes. An industry controlled by a monopolist is known as a e.g. De Beers

Front 29

market power

Back 29

The ability of a monopolist to raise its price above the competitive level by reducing output

Front 30

barrier to entry

Back 30

control of natural resources or inputs
increasing returns to scale
technological superiority
government-created barriers including patents and  copyrights

Front 31

natural monopoly

Back 31

exists when increasing returns to scale provide a large cost advantage to a single firm that produces all of an industry’s output

Front 32

single-price monopolist

Back 32

one who charges all consumers the same price. As the term suggests, not all monopolists do this.

Front 33

price discrimination

Back 33

monopolists find that they can increase their profits by charging different customers different prices for the same good