Unit 3: Costs, Profit & Perfect Competition - Custom Scholars
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# Unit 3: Costs, Profit & Perfect Competition

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Explicit Cost
Is a cost that involves actually laying out money.
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Implicit Cost
Does not require an outlay of money; it is measured by the value, in dollar terms, of benefits that are forgone.
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Economic Profit
Of a business is the business's total revenue minus the opportunity cost of its resources. It is usually less than the accounting profit.
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Implicit Cost Of Capital
Is the opportunity cost of the capital used by a business the income of the owner could have realized from that capital if it had been used in its next best alternative way.
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Normal Profit
An economic profit eaual to zero is also known as a normal profit. It is an economic profit just high neough to keep a firm engaged in its current activity.
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Principle Of Marginal Analysis
Every activity should continue until marginal benefit equals marginal cost.
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Marginal Revenue
Is the change in total revenue generated by an additional unit of output.
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Optimal Output Rule
Says that profit is mazimized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its maginal cost.
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Marginal Cost Curve
Shows how the cost of produing one more unit depends on the quantity that has already been produced.
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Marginal Revenue Curve
Shows how marginal revenue varies as output varies.
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Production Function
Is the relationship between the quantity of inputs a frim uses and the quantity of output it produces.
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Fixed Input
Is an input whose quantity is fixed for a period of time and cannot be varied.
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Variable Input
Is an input whose quantity the firm can cary at any time.
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Long Run
Is the time period in which all inputs can be varied.
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Short Run
Is the time period in which at least one input is fixed.
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Total Product Curve
Shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input.
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Margianl Product
Of an input is the additional quantity of output produced by using one more unit of that input.
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Diminishing Returns To An Input
When an increase in the quantity of that input, holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input.
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Fixed Cost
Is a cost that does not depend on the quantity of output produced. It is ithe cost of the fixed input.
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Variable Cost
Is a cost that depends on the quantity of output produced, . It is the cost of the variable input.
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Total Cost
Of producing a given quantity of output is the sum of the fixed cost and the variable cost of producing that quantity of output.
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Total Cost Curve
Shoes how total cost depends on the quantity of output.
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Average Total Cost(Average Cost)
Often referred to simply as average cost, is total cost divided by quantity of output produced.
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Average Variable Cost
Is the variable cost per unit of output.
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Minimum-Cost Output
Is the quantity of ouput at which average total cost is lowest- it correspons to the bottom of the U-shaped average total cost curve.
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Average Product
Of an input is the total product divided by the quantity of the input.
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Average Product Curve
For an input shows the relationship between the average product and the quantity of the input.
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Long-Run Average Total Cost Curve
Shows the relationship between output and average totla cost when fixed cost has been chosen to minimize average total cost for each level of output.
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Economies Of Scale
When long-run average total cost declines as output increases.
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Increasing Returns To Scale
When output increases more than in proportion to an increase in all inputs. For example, with increasing returns to scale, doubling all inputs would cause output to more than double.
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Diseconomies Of Scale
When long-run average total cost increases as output increases.
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Decreasing Returns To Scale
When output increases less than in proportion to an increase in all inputs.
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Constant Returns To Scale
When output increases directly in proportion to an increase in all inputs.
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Sunk Cost
Is a cost that has already been incurred and is nonrecoverable. A sunk cost should be ignored in decision about future actions.
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Price-Taking Firm
Is a firm whose actions have no effect on the market price of the good or service it sells.
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Price-Taking Consumer
Is a consumer whose actions have no effect on the market price of the good or sercice he or she buys.
question
Perfectly Competitive Market
Is a market in which all market participants are price takers.
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Perfectly Competitive Insustry
Is an industry in which firms are price takers.
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Market Share
Is the fraction of the total insustry output accounted for by that firm's output.
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Standardized Product(Commodity)
When consumers regard the products of different firms as the same good.
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Free Entry And Exit
When new firms can easily enter into the industry and existing firms can easily leave the industry.
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Monopolist
Is the only producer of a good that has no close substitutes. An industry controlled by a monopolist is known as a monopoly.
question
Natural Monopoly
Exists when economies of scale provide a large cost advantages to a single firm that produces all of an industry's output.
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Patent
Gives an inventor a temporary monopoly in the use or sale of an invention.
question
Gives the creator of a literary or artistic work the sole right to profit from that work for a specified period of time.
question
Oligopoly
Is an industry with only a small number of firms. A producer in such an industry is known as an oligopolist.
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Imperfect Competition
When no one firm has a monopoly, but producres nonetheless realize that they can affect market prices, an industry is characterized by imperfect competition.
question
Concentration Ratios
Measures the percentage of industry sales accounted for by the "X" largest firms, for example the four-firm concentration ratio or the eight-firm concentration ratio.
question
Herfindahl-Herschman Index
Is the square of each firm's share of market sales summed over the industry. It gives a picture of the industry market structure.
question
Monopolistic Competition
Is a makert structure in which there are man competing firms in an industry, each firm sells a differentiated product, and there is free entry into and exit from the industry in the long run.
question
Price-Taking Firm's Optimal Output Rule
Says that a price-taking firm's profit is mazimized by producing the quantity of output at whcih the market price is equal to the margainal cost of the last unit produced.
question
Break-Even Price
Of a price-taking firm is the market parice at which it earns zero profit.
question
Shut-Down Price
A firm will cease production in the short run if the market price falls below the shut-down price, which is equal to mimum average variable cost.
question
Short-Run Individual Supply Curve
Shows how an individual firm's profit maximizing level of output depends on the market price, taking the fixed cost as given.
question
Industry Supply Curve
Shows the relationship between the price of a good and the total output of the industry as a whole.
question
Short-Run Industry Supply Curve
Shows how the quantity supplied by an industry depends on the market price, given a fixed number of firms.
question
Short-Run Market Equilibrium
When the quantity supplied equals the quantity demanded, taking the number of producers as given.
question
Long-Run Market Equilibrium
When the quantity supplied equals the quantity demanded, given that suffient time has elapsed for entry into and exit from the industry to occur.
question
Long-Run Industry Supply Curve
Shows how the quantity supplied responds to the price once producers have had time to enter or exit the industry.
question
Increasing-Cost-Industry
Is one with an upward-sloping long-run supply curve.
question
Decreasing-Cost Industry
Is one with a downward-sloping long-run supply curve.
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question
...
...
question
Explicit Cost
Is a cost that involves actually laying out money.
question
Implicit Cost
Does not require an outlay of money; it is measured by the value, in dollar terms, of benefits that are forgone.
question
Economic Profit
Of a business is the business's total revenue minus the opportunity cost of its resources. It is usually less than the accounting profit.
question
Implicit Cost Of Capital
Is the opportunity cost of the capital used by a business the income of the owner could have realized from that capital if it had been used in its next best alternative way.
question
Normal Profit
An economic profit eaual to zero is also known as a normal profit. It is an economic profit just high neough to keep a firm engaged in its current activity.
question
Principle Of Marginal Analysis
Every activity should continue until marginal benefit equals marginal cost.
question
Marginal Revenue
Is the change in total revenue generated by an additional unit of output.
question
Optimal Output Rule
Says that profit is mazimized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its maginal cost.
question
Marginal Cost Curve
Shows how the cost of produing one more unit depends on the quantity that has already been produced.
question
Marginal Revenue Curve
Shows how marginal revenue varies as output varies.
question
Production Function
Is the relationship between the quantity of inputs a frim uses and the quantity of output it produces.
question
Fixed Input
Is an input whose quantity is fixed for a period of time and cannot be varied.
question
Variable Input
Is an input whose quantity the firm can cary at any time.
question
Long Run
Is the time period in which all inputs can be varied.
question
Short Run
Is the time period in which at least one input is fixed.
question
Total Product Curve
Shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input.
question
Margianl Product
Of an input is the additional quantity of output produced by using one more unit of that input.
question
Diminishing Returns To An Input
When an increase in the quantity of that input, holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input.
question
Fixed Cost
Is a cost that does not depend on the quantity of output produced. It is ithe cost of the fixed input.
question
Variable Cost
Is a cost that depends on the quantity of output produced, . It is the cost of the variable input.
question
Total Cost
Of producing a given quantity of output is the sum of the fixed cost and the variable cost of producing that quantity of output.
question
Total Cost Curve
Shoes how total cost depends on the quantity of output.
question
Average Total Cost(Average Cost)
Often referred to simply as average cost, is total cost divided by quantity of output produced.
question
Average Variable Cost
Is the variable cost per unit of output.
question
Minimum-Cost Output
Is the quantity of ouput at which average total cost is lowest- it correspons to the bottom of the U-shaped average total cost curve.
question
Average Product
Of an input is the total product divided by the quantity of the input.
question
Average Product Curve
For an input shows the relationship between the average product and the quantity of the input.
question
Long-Run Average Total Cost Curve
Shows the relationship between output and average totla cost when fixed cost has been chosen to minimize average total cost for each level of output.
question
Economies Of Scale
When long-run average total cost declines as output increases.
question
Increasing Returns To Scale
When output increases more than in proportion to an increase in all inputs. For example, with increasing returns to scale, doubling all inputs would cause output to more than double.
question
Diseconomies Of Scale
When long-run average total cost increases as output increases.
question
Decreasing Returns To Scale
When output increases less than in proportion to an increase in all inputs.
question
Constant Returns To Scale
When output increases directly in proportion to an increase in all inputs.
question
Sunk Cost
Is a cost that has already been incurred and is nonrecoverable. A sunk cost should be ignored in decision about future actions.
question
Price-Taking Firm
Is a firm whose actions have no effect on the market price of the good or service it sells.
question
Price-Taking Consumer
Is a consumer whose actions have no effect on the market price of the good or sercice he or she buys.
question
Perfectly Competitive Market
Is a market in which all market participants are price takers.
question
Perfectly Competitive Insustry
Is an industry in which firms are price takers.
question
Market Share
Is the fraction of the total insustry output accounted for by that firm's output.
question
Standardized Product(Commodity)
When consumers regard the products of different firms as the same good.
question
Free Entry And Exit
When new firms can easily enter into the industry and existing firms can easily leave the industry.
question
Monopolist
Is the only producer of a good that has no close substitutes. An industry controlled by a monopolist is known as a monopoly.
question
Natural Monopoly
Exists when economies of scale provide a large cost advantages to a single firm that produces all of an industry's output.
question
Patent
Gives an inventor a temporary monopoly in the use or sale of an invention.
question
Gives the creator of a literary or artistic work the sole right to profit from that work for a specified period of time.
question
Oligopoly
Is an industry with only a small number of firms. A producer in such an industry is known as an oligopolist.
question
Imperfect Competition
When no one firm has a monopoly, but producres nonetheless realize that they can affect market prices, an industry is characterized by imperfect competition.
question
Concentration Ratios
Measures the percentage of industry sales accounted for by the "X" largest firms, for example the four-firm concentration ratio or the eight-firm concentration ratio.
question
Herfindahl-Herschman Index
Is the square of each firm's share of market sales summed over the industry. It gives a picture of the industry market structure.
question
Monopolistic Competition
Is a makert structure in which there are man competing firms in an industry, each firm sells a differentiated product, and there is free entry into and exit from the industry in the long run.
question
Price-Taking Firm's Optimal Output Rule
Says that a price-taking firm's profit is mazimized by producing the quantity of output at whcih the market price is equal to the margainal cost of the last unit produced.
question
Break-Even Price
Of a price-taking firm is the market parice at which it earns zero profit.
question
Shut-Down Price
A firm will cease production in the short run if the market price falls below the shut-down price, which is equal to mimum average variable cost.
question
Short-Run Individual Supply Curve
Shows how an individual firm's profit maximizing level of output depends on the market price, taking the fixed cost as given.
question
Industry Supply Curve
Shows the relationship between the price of a good and the total output of the industry as a whole.
question
Short-Run Industry Supply Curve
Shows how the quantity supplied by an industry depends on the market price, given a fixed number of firms.
question
Short-Run Market Equilibrium
When the quantity supplied equals the quantity demanded, taking the number of producers as given.
question
Long-Run Market Equilibrium
When the quantity supplied equals the quantity demanded, given that suffient time has elapsed for entry into and exit from the industry to occur.
question
Long-Run Industry Supply Curve
Shows how the quantity supplied responds to the price once producers have had time to enter or exit the industry.
question
Increasing-Cost-Industry
Is one with an upward-sloping long-run supply curve.
question
Decreasing-Cost Industry
Is one with a downward-sloping long-run supply curve.

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