Microeconomics: Objectives of Firms and Market Structures

Comprehensive vocabulary flashcards covering firm objectives, costs, revenues, market structures, and efficiency concepts based on the lecture notes.

Profit Maximisation

The level of output achieved when the addition to total revenue from the last unit sold ($MR$) is equal to the addition to the total cost of producing it ($MC$) ($MR = MC$).

Explicit Costs

Production costs incurred when an actual monetary payment is made.

Implicit Costs

The opportunity cost of production that does not involve monetary payment and is difficult to compute, but necessary for estimating actual economic cost.

Sales Revenue Maximisation

An alternative objective where a firm produces at an output level where $MR = 0$, often to increase market share or link management salary to revenue.

Sales Volume Maximisation

An alternative objective where a firm produces at the breakeven output level where $AR = AC$, aiming to raise demand without incurring subnormal profits.

Profit Satisficing

A compromise between shareholders wanting profit maximisation and management wanting growth, resulting in a negotiated reasonable level of profit.

Accounting Cost

The total of all explicit costs incurred by a firm.

Economic Cost

The sum of both explicit costs and implicit costs.

Short-run

A production period during which there is at least one fixed factor of production.

Total Fixed Cost (TFC)

Production costs that do not vary with the level of output.

Total Variable Cost (TVC)

Production costs that vary positively with the level of output.

Marginal Cost (MC)

The rate of change of total variable cost, calculated as $\frac{\Delta TVC}{\Delta Q}$.

Average Cost (AC)

The cost per unit of output, calculated as $AC = AFC + AVC$ or $\frac{TFC + TVC}{Q}$.

Law of Diminishing Marginal Returns

The principle causing both $MC$ and then $AVC$ to first decrease and then increase as output grows in the short run.

Long-run

A production period in which all factors of production are variable, allowing firms to change the scale of production.

LRAC Curve

A curve showing the lowest possible unit costs to produce each output level when all factors of production are variable.

Minimum Efficient Scale (MES)

The output level where the LRAC first stops falling, corresponding to the lowest point on the curve.

Internal Economies of Scale

A fall in the unit cost of production resulting from a firm expanding its scale of production, represented by movement along the LRAC curve.

Internal Diseconomies of Scale

A rise in unit cost of production when a firm increases output beyond its efficient scale, often due to coordination problems or low morale.

External Economies of Scale

A fall in unit cost of production experienced by a firm due to growth in the industry as a whole, represented by a vertical downward shift of the LRAC curve.

External Diseconomies of Scale

A rise in unit cost of production due to industry growth, often caused by higher input prices or increased strain on infrastructure.

Average Revenue (AR)

The price of the firm's product at each level of output.

Barriers to entry

Obstacles such as internal economies of scale, control of key inputs, or legal protections that prevent new firms from entering a market.

Perfect Competition

A market structure featuring many small firms, identical products, no barriers to entry, and firms that act as price-takers.

Monopolistic Competition

A market structure with a large number of small firms selling differentiated products that are close substitutes.

Monopoly

A market structure with a single producer, unique products with no substitutes, and high barriers to entry, allowing the firm to be a price-setter.

Oligopoly

A market structure with a few dominant firms, high mutual interdependence, and significant market power.

Market Concentration Ratio

The percentage of market output generated by the top $N$ largest firms in an industry.

Horizontal Integration

The joining of firms that produce the same product or service.

Vertical Integration

The joining of firms at different stages of production, categorized as forward (later stage) or backward (earlier stage).

Conglomerate Integration

The joining of firms in different industries to increase risk diversification.

Product Innovation

Efforts to develop new, improved, or differentiated products to increase market power and make demand more price inelastic.

Process Innovation

Efforts to develop new or improved production processes to raise productivity and lower costs.

Cartel

A formal collusive agreement between firms to fix prices or allocate output quotas to reap larger profits.

Tacit Collusion

An unwritten agreement, such as price leadership, where firms follow the pricing policy of a dominant firm without formal coordination.

Limit Pricing

A strategy where a firm sets a price below the estimated $AC$ of potential rivals to create an artificial barrier to entry.

Predatory Pricing

A strategy where a firm temporarily prices below its own $AC$ to force competitors out of the market.

Kinked Demand Theory

A model explaining price rigidity in an oligopoly, assuming rivals will match price decreases but not price increases.

Price Discrimination

The practice of charging different prices to different groups of consumers for the same product for reasons not related to cost.

Short-run Shutdown Condition

The point where a firm will cease operations because its Average Revenue ($AR$) is less than its Average Variable Costs ($AVC$).

Sunk Cost Fallacy

A behavioral economics concept where a person's decision is influenced by past costs that cannot be recovered.

Loss Aversion

The tendency for people to prefer avoiding a loss over making an equivalent or greater gain.

Saliency Bias

The tendency for people to focus on prominent information over less prominent but equally relevant details.

Productive Efficiency

Achieved when output is produced at the lowest possible cost, occurring at the minimum point of the LRAC curve.

X-inefficiency

Inefficiency arising from a lack of competitive pressure, leading to production costs being higher than necessary.

Allocative Efficiency

The output level where society's welfare is maximised, occurring where $P = MC$.

Dynamic Efficiency

Achieved when firms invest in technology over time to improve productivity and product quality.

Marginal Cost Pricing

A government regulation where price is set equal to the firm's marginal cost to reach allocative efficiency.