Microeconomics: Profit Maximization and Competitive Supply

Comprehensive vocabulary flashcards covering Chapter 8: Profit Maximization and Competitive Supply from Microeconomics by Robert S. Pindyck and Daniel L. Rubinfeld.

Price Taker

A firm that has no influence over the market price and takes the price as given, because it sells a sufficiently small proportion of total market output.

Product Homogeneity

A market condition in which the products of all firms are perfectly substitutable with one another, ensuring a single market price where no firm can raise its price without losing all or most sales.

Free Entry (or Exit)

A market condition under which there are no special costs that make it difficult for a firm to enter or exit an industry, allowing buyers to easily switch suppliers and firms to enter or leave.

Profit ($\pi$)

The difference between total revenue ($R$) and total cost ($C$), expressed as $\pi = R - C$.

Marginal Revenue ($MR$)

The change in revenue resulting from a one-unit increase in output.

Profit Maximization in the Short Run

The condition where a firm chooses output $q^*$ so that the difference between revenue and cost is maximized, occurring where marginal revenue equals marginal cost ($MR = MC$).

Demand Curve Faced by a Competitive Firm

A horizontal line indicating perfectly elastic demand at the market price, where marginal revenue, average revenue, and price are all equal ($d = MR = AR = P$).

Competitive Firm's Profit-Maximizing Output Rule

The rule requiring a perfectly competitive firm to choose an output level where marginal cost equals price ($MC(q) = MR = P$).

Output Rule

The principle stating that if a firm produces any output, it should produce at the level at which marginal revenue equals marginal cost ($MR = MC$).

Shutdown Rule

The operational condition stating that a firm should shut down in the short run if the product price is less than average variable cost ($P < AVC$).

Competitive Firm's Short-Run Supply Curve

The portion of the marginal cost ($MC$) curve that lies above the average variable cost ($AVC$) curve.

Firm's Response to an Input Price Change

The reduction in profit-maximizing output (from $q_1$ to $q_2$) caused by an increase in the marginal cost of production (shifting from $MC_1$ up to $MC_2$).

Short-Run Market Supply Curve

The curve obtained by the horizontal summation of the short-run supply curves of all individual firms in an industry.

Elasticity of Market Supply ($E_s$)

The fractional change in market quantity supplied divided by the fractional change in price, given by the formula $E_s = \frac{\Delta Q / Q}{\Delta P / P}$.

Short-Run Decision Rule for Aluminum Smelting

A plant-specific operating rule to produce $600\,\text{tons per day}$ when price is between $\$1140$ and $\$1300\,\text{per ton}$, run overtime producing $900\,\text{tons per day}$ when price exceeds $\$1300\,\text{per ton}$, and cease production if price falls below $\$1140\,\text{per ton}$.