Module 6 Key Words Flashcards
Break Even Point
The break-even point level of output is where total revenue equals total
costs. It occurs where the marginal cost curve intersects the average cost
curve at the minimum point of AC. The price is at this point ensures the
firm is earning zero economic profits.
Entry
Entry is the long-run process of firms entering an industry in response to
the existence of industry profits.
Exit
Exit is the long-run process of firms reducing production and shutting
down in response to industry losses. It implies that, once the firm exits,
they cannot return in the short-run.
Long-Run Equilibrium
Long-run equilibrium occurs when all firms earn zero economic profits producing the output level where P = AC despite doing the best they can (e.g. they are maximizing profits P = MR = MC.)
Long-run equilibrium implies that, as long as input costs, technology, and demand do not change, there is no incentive for firms to enter or exit the industry.
Marginal Revenue
Marginal revenue is the additional revenue gained from selling one more unit of output. MR= ΔREV / ΔQ.
Market Structure
Market structure describes 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.
We study perfect competition; monopoly; oligopoly; monopsony.
Perfect Competition
In perfect competition, each firm faces many competitors that sell identical products so that each firm is a price taker.
Price Taker
A price taker is a firm in a perfectly competitive market that must take the
prevailing market price as given. For instance, grain farmers have almost no ability to individually negotiate prices with buyers.
Shutdown Point
The Shutdown Point is level of output where the firm is making zero profits on its variable inputs. It occurs 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. Note: shutting down only implies a temporary cessation of activities. It is not an exit. For instance, virtually all retail shops shutdown overnight. Hotels will shut down over winter.
Allocative Efficiency
allocative efficiency occurs when the industry is producing the optimal quantity of some output. It occurs when the quantity where the marginal benefit to society of one more unit just equals the marginal cost
Barriers To Entry
barriers to entry occur when the legal, technological, or market forces that
may discourage or prevent potential competitors from entering a market.
For instance, to sell prescription drugs, you will need a license from government. Alternately, to enter the business of making jet aircraft may be so expensive, that only the existing firms can be profitable.
Copyright
Copyright is a form of legal protection to prevent copying, for commercial
purposes, original works of authorship, including books, music, and screenplays. A copyright holder can transfer the right to sell their original works.
Deregulation
deregulation is the process of removing government controls over setting prices and quantities in certain industries. For instance, Saskatchewan deregulated the sale of alcohol so that private companies can sell wine, beer, and spirits.
Intellectual Property
Intellectual property is the body of law including patents, trademarks, copyrights, and trade secret law that protect the right of inventors to produce and sell their inventions.
Legal Monopoly
Legal monopoly are the legal prohibitions against competition, such as regulated monopolies and intellectual property protection. A legal monopoly differs from a natural monopoly. With a natural monopoly, only one firm can survive in a marketplace in the absence of government
protection. For instance, Facebook is considered a natural monopoly
