Econ Module 3

Question 1

Willingness to Sell (WTS)

Answer 1

From the standpoint of a supplier, the minimum price that the firm is willing to accept in return for the input it sells; from the standpoint of a seller, the minimum price that the seller is willing to accept to supply a given quantity of a good or service.

Question 2

Consumer Surplus

Answer 2

The value captured by consumers in a market transaction; mathematically, the difference between consumer willingness to pay and price, added up for all consumers who get to transact in the market.

Question 3

Value, Created

Answer 3

From the standpoint of the firm, the difference between the willingness to pay of its consumers and the willingness to sell of its suppliers; also equal to the sum of producer and consumer surplus.

Question 4

Supplier Surplus

Answer 4

The value captured by the suppliers of a firm’s inputs of production; mathematically, the difference between supplier willingness to sell and a firm’s production cost, added up for all suppliers who provide inputs to the firm.

Question 5

Fixed Cost (FC)

Answer 5

Costs incurred by a business in the production of a product or service that do not vary as the quantity produced rises or falls.

Question 6

Variable Cost (VC)

Answer 6

Costs incurred by a business in the production of a product or service that vary with the level of production.

Question 7

Sunk Cost

Answer 7

A fixed cost that has already been incurred at the time that a firm is making a production or pricing decision (e.g. money spent on exploratory research for a new product shouldn’t be considered when pricing the product).

Question 8

Opportunity Cost

Answer 8

The value of the best alternative use of a resource.

Question 9

Economic Cost

Answer 9

The total cost of an activity, taking into account the direct or explicit costs of the activity, as well as the opportunity costs.

Question 10

Economic Profit

Answer 10

A firm’s “economic profit” is the measure of profits that also takes into account the opportunity cost of the next best alternatives.

Question 11

Relative Cost Analysis

Answer 11

The analysis of how a firm’s costs compare to its competitors for various activities in its business model.

Question 12

Supply Curve, Individual

Answer 12

A graphical representation of a producer’s willingness to sell various quantities of a product or service (price on Y-axis, quantity on X-axis).

Question 13

Supply Curve, Market

Answer 13

A graphical representation of the willingness to sell of all producers for various quantities of a product or service; the market supply curve is the horizontal sum of each producer’s unique willingness to sell at a given price.

Question 14

Price War

Answer 14

A firm that is already in an industry will be willing to sell its product for any price at or above its variable costs.

Question 15

Industry Entry

Answer 15

A firm that is considering entering an industry will aim to cover both its variable costs and its fixed costs.

Are your average costs lower than your competitor’s marginal cost?

Question 16

Economies of Scale

Answer 16

The fixed cost advantage that arises to firms with increased output of a good or service; the greater the quantity produced and sold by a firm, the lower the fixed cost per unit incurred.

Question 17

Average Total Cost (ATC)

Answer 17

The costs incurred in producing a product per unit of the product sold; mathematically, the total costs for a business, divided by the total volume of units produced.

Question 18

Total Cost (TC)

Answer 18

The total amount of money used in producing a product or providing a service; mathematically, total cost is the sum of total fixed costs and total variable costs.

Question 19

Minimum Efficient Scale (MES)

Answer 19

The minimum efficient scale (MES) is the lowest point on a cost curve at which a company can produce its product at a competitive price. At the MES point, the company can achieve the economies of scale necessary for it to compete effectively in its industry.

Question 20

Competitors

Answer 20

A business’ competitors include not only other companies in its industry, but also parties with which the business competes to capture value, such as suppliers and customers.