AP Microeconomics Unit 3 Vocab

Economic Cost

A payment that must be made to obtain and retain the services of a resource.

Explicit Cost

The monetary payment a firm must make to an outsider to obtain a resource.

Implicit Cost

The monetary income a firm sacrifices when it uses a resource it owns rather than supplying the resource in the market.

Short Run Time

A period of time in which producers are able to change in the quantities of some but not all of the resources they employ.

Long Run Time

A period of time long enough to enable producers of a product to change the quantities of all the resources they employ.

Law of Diminishing Returns

The principle that as successive increments of a variable resources are added to a fixed resource, the marginal product of the variable resource will eventually decrease.

Total Product

The total output of a particular good or service produced by a firm.

Marginal Product

The additional output produced when one additional unit of a resource is employed.

Average Product

the total output produced per unit of a resource employed.

Average Variable Cost

A firm's total variable cost divided by output.

Average Total Cost

A firm's total cost divided by output; equal to average fixed cost plus average variable cost.

Total Revenue

The total number of dollars received by a firm from the sale of a product; equal to the quantity sold multiplied by the price at which it is sold.

Marginal Revenue

The change in total revenue that results from the sale of one additional unit of a firm's product; equal to the change in total revenue divided by the change in quantity sold.

Profit Maximizing

The quantity of each resource a firm must employ to maximize its profit or minimize its loss. the combination in which the marginal revenue is equal to its marginal cost.

Break Even Point

Any output at which a competitive firm's total cost and total revenue are equal; has neither an economic profit nor loss.

Loss-Minimizing

firm minimizes economic loss by producing output that equates marginal revenue and marginal cost if price is less than ATC but greater than AVC (ATC>P>AVC)

Close-Down

the circumstance in which a firm would experience a loss greater than its total fixed cost if it were to produce any output greater than zero.

MR(P)=MC Rule

The principle that a firm will maximize its profit by producing the output at which marginal revenue and marginal cost are equal.

Short Run Supply Curve

A supply curve that shows the quantity of a product a firm in a purely competitive industry will offer to sell at various prices in the short run.

Long Run Supply Curve

A curve showing the prices at which a purely competitive industry will make various quantities of the product available in the long run.

Constant Cost Industry

An industry in which expansion by the entry of new firms has no effect on the prices firms in the industry must pay for resources and thus no effect on production costs.

Increasing Cost Industry

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.

Marginal Cost

The extra/additional benefit of consuming one more unit of some good or service.

Economies of Scale

Reductions in the average total cost of producing a product as the firm expands the size of the output in the long run.

Diseconomies of Scale

Increases in the average total cost of producing a product as the firm expands the size of its output in the long run.

Perfect (Pure) Competition

A market structure in which a very large number of firms sells a standardized product, into which entry is very easy, in which the individual seller has no control over the product price, and in which there is no non-price competition.

Perfect (Pure) Monopoly

A market structure in which one firm sells a unique product, into which entry is blocked, in which the single firm has considerable control over product price, and in which non-price competition may or may not be found.

Monopolistic Competition

A market structure in which many firms sell a differentiated product, into which entry is relatively easy, in which the firm has some control over its product price, and in which there is considerable non-price competition.

Oligopoly

A market structure in which a few firms sell either a standardized or differentiated product, into which entry is difficult, in which the firm has limited control over product price because of mutual interdependence.

Imperfect Competition

All market structures except perfect competition; includes monopoly, monopolistic competition, and oligopoly.

Price Maker

A seller or buyer of a product that is able to affect the price at which a product sells by changing the amount it sells.

Price Taker

A seller or buyer of a product that is unable to affect the price at which a product sells by changing the amount it sells.

Average Revenue

Total revenue from the sale of a product divided by the quantity sold.

Decreasing-Cost Industry

An industry in which expansion through the entry of new firms lowers the prices that firms in the industry must pay for resources and therefore decrease their production costs.

Homogeneous Oligopoly

An oligopoly in which the firms produce a standardized product.

Differentiated Oligopoly

An oligopoly in which the firms produce a differentiated product.

Kinked Demand Curve

The demand curve for a non-collusive oligopolist, which is based on the assumption that rivals will match a price decrease and will ignore a price increase.

Collusive Monopoly (Collusion)

A situation in which firms act together and in agreement collude to fix prices, thus restricting competition.

Cartel

A formal agreement among firms in an industry to set the price of a product and establish the outputs of the individual firms.

Normal Profit

The payment made by a firm to obtain and retain entrepreneurial ability; the minimum income entrepreneurial ability must receive to induce it to perform entrepreneurial functions for a firm.

Accounting Profit

total revenue minus total explicit cost

Socially Optimal Price

The price of a product that results in the most efficient allocation of an economy's resources and that is equal to the marginal cost of the product.

Fair-Return Price

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.

Game Theory (Prisoners Dilemma)

A means of analyzing the pricing behavior of oligopolists that uses the strategy associated with games such as chess and bridge.

Nash Equilibrium

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.