Unit 4: Imperfect Competition

question

explicit cost

answer

opportunity cost of resources employed by a firm that takes the form of cash payments

question

implicit cost

answer

A firm's opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment

question

normal profit

answer

the accounting profit earned when all resources earn their opportunity cost, 0 economic profit, P=ATC

question

economic profit

answer

total revenue minus total cost, including both explicit and implicit costs

question

accounting profit

answer

total revenue minus total explicit cost

question

short run

answer

the period of time during which at least one of a firm's inputs is fixed

question

long run

answer

the time period in which all inputs can be varied

question

law of diminishing returns

answer

the principle that, at some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline

question

total product

answer

total output produced by the firm

question

marginal product

answer

the increase in output that arises from an additional unit of input

question

average product

answer

output per worker, total product/amount of labor

question

fixed cost

answer

a cost that does not change, no matter how much of a good is produced

question

variable cost

answer

a cost that rises or falls depending on how much is produced

question

total cost

answer

fixed costs plus variable costs

question

average fixed cost

answer

fixed cost divided by the quantity of output

question

average variable cost

answer

variable cost divided by the quantity of output

question

average total cost

answer

total cost divided by the quantity of output

question

marginal cost

answer

the cost of producing one more unit of a good

question

economies of scale

answer

factors that cause a producer's average cost per unit to fall as output rises

question

constant returns to scale

answer

when long-run average total cost is constant as output increases

question

decreasing returns to scale

answer

when long-run average total cost increases as output increases

question

negative returns to scale

answer

where if all the factors of production are increased in a given proportion, output increases in a smaller proportion. It means, if inputs are doubled, output will be less than doubled.

question

price taker

answer

a buyer or seller that is unable to affect the market price

question

average revenue

answer

total revenue divided by the quantity sold

question

total revenue

answer

the total amount of money a firm receives by selling goods or services, PxQ

question

marginal revenue

answer

the additional income from selling one more unit of a good; sometimes equal to price

question

break-even point

answer

the point at which the costs of producing a product equal the revenue made from selling the product, P=ATC

question

profit maximization

answer

setting prices so that total revenue is as large as possible relative to total costs MC=MR

question

constant cost industry

answer

an industry that can expand or contract without affecting the long run per-unit cost of production; the long-run industry supply curve is horizontal

question

increasing cost industry

answer

an industry in which expansion through the entry of new firms raises the prices firms in the industry must pay for resources and therefore increases their production costs

question

productive efficiency

answer

a situation in which a good or service is produced at the lowest possible cost, P=minATC

question

allocative efficiency

answer

when the mix of goods being produced represents the mix that society most desires, socially optimal P=MC

question

consumer surplus in pure competition

answer

the area below the demand curve above the market price

question

producer surplus in pure competition

answer

the reduction in economic surplus resulting from a market not being in competitive equilibrium

question

deadweight loss

answer

business practices or conditions that make it difficult for new firms to enter the market

question

barriers to entry

answer

the business practice of selling the same good at different prices to different customers

question

price discrimination

answer

A market in which there are many buyers but only one seller.

question

monopoly

answer

Where P=MC, it is the best option for consumers since it is the highest quantity at the lowest price.

question

socially optimal price

answer

the price of a product that enables its producer to obtain a normal profit and that is equal to the average total cost of producing it, P=ATC

question

fair-return price

answer

market structure in which average costs of production are lowest when all output is produced by a single firm

question

natural monopoly

answer

a market structure in which many companies sell products that are similar but not identical

question

monopolistic competition

answer

real or imagined differences between competing products in the same industry

question

product differentiation

answer

the difference between a firm's profit-maximizing quantity and the quantity that minimizes average cost

question

excess capacity

answer

a state of limited competition, in which a market is shared by a small number of producers or sellers, where they offer similar or identical products

question

oligopoly

answer

A situation in which a change in price strategy (or in some other strategy) by one firm will affect the sales and profits of another firm (or other firms). Any firm that makes such a change can expect the other rivals to react to the change.

question

mutual interdependence

answer

the percentage of the market's total output supplied by its four largest firms

question

concentration ratio

answer

a measure of the concentration and competitiveness of an industry; calculated as the sum of the squared percentage market shares of the individual firms in the industry

question

herfindahl index

answer

Evaluates alternate strategies when outcome depends not only on each individual's strategy but also that of others.

question

game theory

answer

a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen

question

Nash Equilibrium

answer

a strategy that is the best for a firm, no matter what strategies other firms use

question

dominant strategy

answer

secret agreement

question

collusion

answer

a formal organization of producers that agree to coordinate prices and production

question

cartel

answer

(a.k.a. "gentlemen's agreements), competing firms reach a verbal understanding on product price, leaving market shares to be decided by nonprice competition

question

tacit understandings

answer

the strategy by which one or more dominant firms set the pricing practices that all competitors in an industry follow

question

price leadership

answer

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question

explicit cost

answer

opportunity cost of resources employed by a firm that takes the form of cash payments

question

implicit cost

answer

A firm's opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment

question

normal profit

answer

the accounting profit earned when all resources earn their opportunity cost, 0 economic profit, P=ATC

question

economic profit

answer

total revenue minus total cost, including both explicit and implicit costs

question

accounting profit

answer

total revenue minus total explicit cost

question

short run

answer

the period of time during which at least one of a firm's inputs is fixed

question

long run

answer

the time period in which all inputs can be varied

question

law of diminishing returns

answer

question

total product

answer

total output produced by the firm

question

marginal product

answer

the increase in output that arises from an additional unit of input

question

average product

answer

output per worker, total product/amount of labor

question

fixed cost

answer

a cost that does not change, no matter how much of a good is produced

question

variable cost

answer

a cost that rises or falls depending on how much is produced

question

total cost

answer

fixed costs plus variable costs

question

average fixed cost

answer

fixed cost divided by the quantity of output

question

average variable cost

answer

variable cost divided by the quantity of output

question

average total cost

answer

total cost divided by the quantity of output

question

marginal cost

answer

the cost of producing one more unit of a good

question

economies of scale

answer

factors that cause a producer's average cost per unit to fall as output rises

question

constant returns to scale

answer

when long-run average total cost is constant as output increases

question

decreasing returns to scale

answer

when long-run average total cost increases as output increases

question

negative returns to scale

answer

where if all the factors of production are increased in a given proportion, output increases in a smaller proportion. It means, if inputs are doubled, output will be less than doubled.

question

price taker

answer

a buyer or seller that is unable to affect the market price

question

average revenue

answer

total revenue divided by the quantity sold

question

total revenue

answer

the total amount of money a firm receives by selling goods or services, PxQ

question

marginal revenue

answer

the additional income from selling one more unit of a good; sometimes equal to price

question

break-even point

answer

the point at which the costs of producing a product equal the revenue made from selling the product, P=ATC

question

profit maximization

answer

setting prices so that total revenue is as large as possible relative to total costs MC=MR

question

constant cost industry

answer

an industry that can expand or contract without affecting the long run per-unit cost of production; the long-run industry supply curve is horizontal

question

increasing cost industry

answer

an industry in which expansion through the entry of new firms raises the prices firms in the industry must pay for resources and therefore increases their production costs

question

productive efficiency

answer

a situation in which a good or service is produced at the lowest possible cost, P=minATC

question

allocative efficiency

answer

when the mix of goods being produced represents the mix that society most desires, socially optimal P=MC

question

consumer surplus in pure competition

answer

the area below the demand curve above the market price

question

producer surplus in pure competition

answer

the reduction in economic surplus resulting from a market not being in competitive equilibrium

question

deadweight loss

answer

business practices or conditions that make it difficult for new firms to enter the market

question

barriers to entry

answer

the business practice of selling the same good at different prices to different customers

question

price discrimination

answer

A market in which there are many buyers but only one seller.

question

monopoly

answer

Where P=MC, it is the best option for consumers since it is the highest quantity at the lowest price.

question

socially optimal price

answer

the price of a product that enables its producer to obtain a normal profit and that is equal to the average total cost of producing it, P=ATC

question

fair-return price

answer

market structure in which average costs of production are lowest when all output is produced by a single firm

question

natural monopoly

answer

a market structure in which many companies sell products that are similar but not identical

question

monopolistic competition

answer

real or imagined differences between competing products in the same industry

question

product differentiation

answer

the difference between a firm's profit-maximizing quantity and the quantity that minimizes average cost

question

excess capacity

answer

a state of limited competition, in which a market is shared by a small number of producers or sellers, where they offer similar or identical products

question

oligopoly

answer

question

mutual interdependence

answer

the percentage of the market's total output supplied by its four largest firms

question

concentration ratio

answer

a measure of the concentration and competitiveness of an industry; calculated as the sum of the squared percentage market shares of the individual firms in the industry

question

herfindahl index

answer

Evaluates alternate strategies when outcome depends not only on each individual's strategy but also that of others.

question

game theory

answer

a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen

question

Nash Equilibrium

answer

a strategy that is the best for a firm, no matter what strategies other firms use

question

dominant strategy

answer

secret agreement

question

collusion

answer

a formal organization of producers that agree to coordinate prices and production

question

cartel

answer

(a.k.a. "gentlemen's agreements), competing firms reach a verbal understanding on product price, leaving market shares to be decided by nonprice competition

question

tacit understandings

answer

the strategy by which one or more dominant firms set the pricing practices that all competitors in an industry follow

question

price leadership

answer

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Unit 4: Imperfect Competition

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