economics chapter 10 key terms

command system

a method of organizing production that uses a managerial hierarchy

economic depreciation

the fall in the market value of a firm’s capital over the year: the market price of the capital at the start of the year minus the market price of the capital at the end of the year

economic efficiency

occurs when the firm produces a given output at the least cost

economic profit

total revenue minus total cost, with total cost measured as the opportunity cost of production

economics of scale

when the cost of producing a unit of a good falls as its output rate increases

firm

an institution that hires factors of production and organizes those factors to produce and sell goods and services

four-firm concentration ratio

the percentage of the value of sales accounted for by the four largest firms in an industry

Herfindahl-Hirschman Index (HHI)

the square of the percentage market share of each firm summed over the largest 50 firms (or summed over all the firms if there are fewer than 50) in a market

implicit central rate

the firm’s opportunity cost of using the capital it owns. it has two categories:

• economic depreciation

• forgone interest

incentive system

a method of organizing production that uses a market-like mechanism inside the firm. managers create compensation schemes to induce workers to perform in ways that maximize the firm’s profit

monopolistic competition

a market structure in which a large number of firms compete by making similar but slightly different products

monopoly

a market structure in which there is only one firm and it produces a good or service that has no close substitutes, and the firm is protected by a barrier preventing the entry of new firms

normal profit

the profit that an entrepreneur earns on average

oligopoly

a market structure in which a small number of firms compete

perfect competition

arises when there are many firms, each selling an identical product, many buyers, and no restrictions on the entry of new firms into the industry

principal-agent problem

the problem of devising compensation rules that include an agent to act in the best interest of a principal

product differentiation

making a product slightly different from the product of a competing firm

technological efficiency

occurs when a firm produces a given output by using the least amount of inputs

technology

any method of producing a good or service

transactions costs

the costs that arise from finding someone with whom to do business, of reaching an agreement about the price and other aspects of the exchange, and of ensuring that the terms of the agreement are fulfilled