Microeconomic Definitions - AP

Allocative Efficiency

Achieved when the economy is producing an output where the marginal benefit is equal to the marginal cost.

Average Fixed Cost

The total fixed cost divided by output, which continuously falls as output increases.

Average Product of Labour

A measure of average labour productivity and is the total product divided by the amount of labour employed.

Average Revenue

The total revenue divided by the quantity, equivalent to the price.

Average Tax Rate

The proportion of total income paid to taxes.

Average Total Cost

The total cost divided by output.

Average Variable Cost

The total variable cost divided by output.

Break-Even Point

The point where the total cost is equal to the total revenue earned, economic profit is zero, and there is no net loss or gain.

Cartels

A group of firms that agree not to compete with each other on the basis of price, production, or other competitive dimensions.

Collusive Oligopoly

An illegal practice where firms agree to mutually improve their situation.

Complementary Resources

Resources that often work together, so a change in price for oneresource can increase the demand for the other resource.

Concentration Ratio

The sum of the market that is shared by a specific number of firms.

Constant Cost Industry

Where the entry or exit of firms do not shift the cost curves of firms in the industry.

Constant Returns to Scale

This occurs when LRAC is constant across a variety of plant sizes.

Constant Returns to Scale to Production

The long-run outcome when output exactly doubles from a doubling in all inputs.

Constrained Utility Maximization

Constrained by prices and income, a consumer stops consuming a good when the price paid for the next unit is equal to the marginal benefit received.

Cross-Price Elasticity of Demand

A measure of how sensitive the consumption of one good is to a change in the price of another good.

Dead-Weight Loss

The lost net benefit to society caused by a movement away from the competitive market equilibrium.

Decreasing Cost Industry

Where the entry of new firms shifts the cost curves for all firms downward.

Decreasing Returns to Scale in Production

The long-run outcome when output less than doubles from a doubling in all inputs.

Diseconomies of Scale

The upward part of the LRAC curve where LRAC rises as plant size increases.

Dominant Strategy

A strategy that is always the best strategy to pursue, regardless of what a rival is doing.

Economies of Scale

The downward part of the LRAC curve where LRAC falls as the plant size increases.

Egalitarianism

The philosophy that all citizens should receive an equal share of economic resources.

Elasticity

The measure of the sensitivity of a consumer's consumption to an external factor.

Excess Capacity

The difference between the monopolistic competition output, and the output at minimum ATC.

Excise Tax

A per-unit tax on production that results in a vertical shift upward in the supply curve by the amount of tax.

Explicit Costs

Direct, purchased, out-of-pocket costs paid to resource suppliers outside the firm.

Factor Market

The market where factors of production are purchased and sold.

Fixed Inputs

Production inputs that cannot be changed in the short run.

Free-Rider Problem

This happens when some members of a community know that they can consume the public good while others provide for it.

Game Matrix

A series of stages where two players with opposing interests have to make simultaneous decisions.

Game Tree

A series of stages where one player moves first, while the second player observes the choices made by the first player and reacts to it.

Gini Ratio

A measure of a nation's income inequality, measured in a unit of one to zero.

Horizontal Summation

The process of adding the individual quantities, at every price, demanded to find the market demand curve for a good or service.

Implicit Costs

Indirect, non purchased, or opportunity costs of resources provided by the entrepreneur.

Import Quota

A limitation or maximum amount of a good that can be imported into the domestic market.

Incidence of Tax

The proportion of the tax paid by consumers in the form of a higher price for the taxed good is greater if demand for the good is inelastic and supply is elastic.

Income Elasticity

A measure of how sensitive consumption of a good is to a change in a consumer's income.

Increasing Cost Industry

Where the entry of new firms shifts the cost curves for all firms upward.

Increasing Returns to Scale in Production

The long-run outcome when output more than doubles from a doubling in all inputs.

Inferior Goods

A good in which an increase in income causes a decrease in the consumption of that good.

Law of Diminishing Marginal Returns

As successive units of a variable resource are added to a fixed resource, beyond some point, the marginal product falls.

Law of Diminishing Marginal Utility

In a given period of time, the marginal utility from consumption of one more of that item decreases.

Law of Supply

Holding all else equal, when the price of a good rises, suppliers increase their quantity supplied for that good.

Least-Cost Rule

The combination of labour and capital that minimizes total costs for a given production rate.

Lorenz Curve

A graphical representation of a nation's income distribution.

Luxuries

A type of normal good in which a relatively small increase in income causes a large increase in the consumption of that good.

Marginal Cost

The additional cost of producing one more unit of output .

Marginal Private Benefit Curve

The curve that reflects the additional benefit received by actual consumers of a good, also known as the market demand curve.

Marginal Private Cost Curve

The curve that reflects the additional cost incurred by actual producers of a good, also known as the market supply curve.

Marginal Product of Labour

The change in total produce resulting from a change in the labour output.

Marginal Productivity Theory

The philosophy that all citizens should receive a share of economic resources proportional to the marginal revenue product of their productivity.

Marginal Resource Cost

The measure of the cost the firm incurs from an additional unit of an input.

Marginal Revenue Product

The measure of the value of what the net unit of a resource brings to the firm.

Marginal Social Benefit Curve

The curve that reflects the additional benefit received by all members of society, including those who receive spillover benefits, also known as the socially optimal demand curve.

Marginal Social Cost Curve

The curve that reflects the additional cost incurred by all members of society, including those who incur spillover costs, also known as the marginal socially optimal supply curve.

Marginal Tax Rate

The rate or percentage or tax paid on the last dollar earned.

Marginal Utility

The additional utility received (or lost) from the consumption of the next unit of a good.

Market Power

The ability to set the price above the perfectly competitive level.

Minimum Efficient Scale

The plant size at which the LRAC first reaches its minimum point.

Monopolistic Competition

A type of market structure characterized by a few small firms producing a differentiated product with easy barriers to entry.

Monopolistic Competition Long-Run Equilibrium

Occurs when no firms enter or exit the market, though the long-run is not allocatively efficient or productively efficient.

Monopoly

A type of market structure characterized by a single firm producing a product with no close substitutes, barriers to entry, and price-making power.

Monopoly Long-Run Equilibrium

The long-run equilibrium for the monopoly is not allocatively efficient or productively efficient.

Monopsonist

A firm that has market power in the factor market.

Nash Equilibrium

The outcome of a game for which each player's strategy maximizes their payoff, given the strategies used by rival players.

Natural Monopoly

A case where economies of scale are so extensive that it is less costly for one firm to supply the entire range of demand.

Necessities

A type of normal good in which a relatively small increase in income causes a relatively small increase in the consumption of that good.

Negative Externality

This exists when the production of a good creates disutility, or spillover costs, for third parties not directly involved in the consumption or production of the good.

Normal Good

A good in which an increase in income causes an increase in the consumption of that good.

Normal Profit

Where firms are earning zero economic profit or a fair rate of return on invested resources.

Oligopoly

A type of diverse market structure characterized by a small number of interdependent large firms producing either a standardized or differentiated product with barriers to entry.

Output Effect

Where the change in price of one input changes the firm's production costs, and output moves in the opposite direction.

Perfect Competition

A type of market structure characterized by many small firms producing a standardized product, in an industry that has no barriers to entry or exit.

Perfect Price Discrimination

The type of price discrimination where each consumer pays eactly their maximum willingness to pay.

Perfectly Competitive Long-Run Equilibrium

This occurs in perfect competition when there is no more incentive for firms to enter or exit the market.

Perfectly Elastic

Even the smallest percentage in price can cause an infinite change in quantity demanded.

Perfectly Inelastic

There is no decrease in quantity demanded when there is an increase in price.

Positive Externality

This exists when the production of a good creates utility, or spillover benefits, for third pirates not directly involved in the consumption or production of the good.

Price Ceiling

A legal maximum price adobe which the product cannot be sold, which creates a permanent shortage.

Price Discrimination

Selling the same god at different prices to differet consumers.

Price Floor

A legal minimum price below which the product cannot be sold, that creates a permanent surplus.

Prisoner's Dilemma

A game where the two rivals achieve a less desirable outcome because they are unable to coordinate their strategies.

Private Goods

Goods that are both rival and excludable, which means consumers who do not pay for that good are excluded from consumption.

Product Demand

A consumer's willingness to purchase a good or service at a given price.

Production Function

The mechanism for combining production resources with existing technology into finished goods and services.

Productive Efficiency

Achieved when the economy is producing a level of output with the lowest possible cost.

Profit Maximizing Rule

All firms maximize profit by producing at where MR = MC.

Progressive Tax

The proportion of income paid in taxes rises as income rises.

Proportional Tax

A constant proportion of income is paid in taxes no matter the level of income.

Protective Tariff

An excise tax levied on a good that is produced in the domestic market.

Public Goods

Goods that are both nonrival and nonexcludable, which means that one person's consumption does not prevent another from consuming the good.

Quintiles

Equal sizes of population divided into fifths to see the distribution of a certain variable.

Regressive Tax

The proportion of income paid in taxes decreases as income rises.

Revenue Tariff

An excise tax levied on goods that are not produced in the domestic market.

Shutdown Point

The output where AVC is minimized, and firms can choose to shut down or produce zero units in the short-run if the price falls below this point.

Spillover Benefits

Additional benefits to society, not captured by the market demand curve form the production of a good, resulting in a price that is too high and a market quantity that is too low.

Spillover Costs

Additional costs to society, not captured by the market supply curve from the production of a good, resulting in price that is too low and a market quantity that is too high.

Subsidy

Money granted by the government to support producers of a good or service that benefits society so that it can be produced in greater quantities at lower prices to consumers.