Chapter 7: MARKET STRUCTURES, PERFECT COMPETITION, + LONG RUN SUPPLY Flashcards
A market is more concentrated when there are fewer firms competing in it; the concentration is lower when there are more firms
industry concentration
The phenomenon in which the amount of time required to complete a task reduces as you gain experience; corresponds to a downward-sloping average cost curve
learning by doing
When a firm creates a new market with new goods (e.g., Apple’s iPhone)
market making
Goods, services, and capital are being allocated in the best way possible on the production possibility frontier (PPF)
allocative efficiency
Occurs at maximum efficiency when it is impossible to make one party better off without making someone worse off
pareto efficiency
An outcome where at least one person could be better off without making anyone else worse off
pareto-superior outcome
Goods are being produced at the lowest cost of production
productive efficiency
Expanding all inputs proportionately does not change the average cost of production
constant returns to scale
Resources that firms use to produce their products, for example, labor and capital
factors of production (or inputs)
Factors of production that can’t be easily increased or decreased in a short period of time
fixed inputs
Period of time during which all of a firm’s inputs are variable
long run
The gap between average variable costs and average total costs
average fixed cost
Profit divided by the quantity of output produced; also known as profit margina
average profit
Total cost divided by the quantity of output
average total cost
Variable cost divided by the quantity of output; total costs - fixed costs / quantity of output
average variable cost
Level of output where the marginal cost curve intersects the average cost curve at the minimum point of AC; if the price is at this point, the firm is earning zero economic profits
break even point
General rule that as a firm employs more labor, eventually the amount of additional output produced declines
diminishing marginal productivity
Level of output where the marginal cost curve intersects the average variable cost curve at the minimum point of AVC; if the price is below this point, the firm should shut down immediately
shutdown point
The horizontal sum of all the supply curves for the many firms in a perfectly competitive industry
total supply in the industry
A firm in a perfectly competitive market that must take the prevailing market price as given; a firm that takes the constant price as given where demand intersects with supply
price taker
Change in total cost divided by change in quantity; the change in total cost for a unit change in output (the slope of the total cost curve); the additional cost of producing one more unit
marginal cost
Total revenues minus explicit costs, including depreciation
accounting profit
Total revenue divided by the quantity of output; equal to the price a firm charges for its goods
average revenue
Cost of the fixed inputs; expenditure that a firm must make before production starts and that does not change regardless of the production level
fixed cost
The additional revenue gained from selling one more unit; the change in total revenue for a unit change in output (the slope of the total revenue curve); mr(qi) = ΔR/Δqi
marginal revenue
A market structure in which firms are producing differentiated goods in an industry; in these types of market structures, the firm has a downward-sloping demand curve and a downward-sloping marginal revenue curve (inside its demand curve)
monopolistic competition
Price determined by the total output
p(Q)
Any gap between the revenue and cost
profits
The sum of every firm’s quantity in an industry; Q = q1 + q2 + … + qn
Q
A firm’s output
qi
Fixed costs + variable costs
total cost
The price at which we sell a good multiplied by the quantity sold
total revenue
Total revenues minus total costs (explicit plus implicit costs)
economic profit
Goods that are in the same industry but that are different in some way; e.g., computers (Mac or PC), sodas (Coca Cola or Pepsi), fashion brands, car models
differentiated good
The long-run process of firms entering an industry in response to industry profits
entry
The long-run process of firms reducing production and shutting down in response to industry losses
exit
An organization that combines inputs of labor, capital, land, and raw or finished component materials to produce outputs
firm
A firm that is already in an industry
incumbent firm
Period of time during which all of a firm’s inputs are variable
long run
Where all firms earn zero economic profits producing the output level where P = MR - MC and P = (TR / TO) - AC
long-run equilibrium
Result in an easy to enter industry
low barriers to entry
The conditions in an industry, such as number of sellers, how easy or difficult it is for a new firm to enter, and the type of products that are sold
market structure
One big firm makes up an industry
monopoly
A few firms make up an industry
oligopoly
Each firm faces many competitors that sell identical products
perfect competition
The process of combining inputs to produce outputs, ideally of a value greater than the value of the inputs
production
Obstacles such that an industry is difficult to enter
significant barriers to entry
Defined by a specific set of characteristics/rules; the particular seller of these goods does not impact the quality or characteristics of the good (in a substantial way)
standardized or homogeneous good
A firm’s shutdown point occurs where ______________.
Price equals average variable cost
A firm’s profit margin is defined as ______________.
The difference between price and average cost at a given level of output
