ECON 200 Unit 2

accounting profit

calculated by subtracting the explicit costs from total revenue

diminishing marginal product

when successive increases in inputs are associated with a slower rise in output

economic profit

calculated by subtracting both the explicit costs and the implicit costs of doing business from total revenue

explicit costs

tangible out-of-pocket expenses

factors of production

the inputs (labor, land, and capital) used in producing goods and services

fixed costs

unavoidable; they do not vary with output in the short run. Also known as overhead costs.

fixed inputs

cannot bechanged in the short run

implicit costs

the opportunity costs of using resources already owned for one purpose rather than another

loss

results when total revenue is less than total cost

marginal cost (MC)

the increase in cost that occurs from producing one additional unit of output

marginal product

the change in output associated with one additional unit of an input

marginal revenue (MR)

the additional revenue generated by the production and sale of one more unit of output

output

the good or service it produces

production function

the relationship betwen inputs and output

profit

results when total revenue is higher than total cost

profit-maximizing rule

profit maximization occurs when the firm chooses the quantity that causes marginal revenue to equal marginal cost, or MR = MC

scale

the size of the production process

total cost

the amount a firm spends to produce and/or sell goods and services

total output

the sum of the individual workers’ marginal products

total revenue

the amount a firm receives from the sale of goods and services

variable costs

change with the rate of output

variable inputs

can be changed quickly to increase or decrease output levels

average total cost (ATC)

the total cost of producing a particular amount of output, divided by the amount of output

barriers to entry

restrictions that make it more difficult for new firms to enter the market

competitive market

when there are so many buyers and sellers that each has only a small (negligible) impact on the market price and output

market power

a firm’s ability to influence the price of a good or service

market structure

the way firms in a particular market are interconnected

price taker

a _ has no control over the price set by the market. It “takes” (accepts) the price determined by the overall supply and demand conditions that regulate the market

signals

convey information about the profitability of a market

barriers to entry

restrictions that make it difficult for new firms to enter a market

deadweight loss

the decrease in economic activity caused by market distortions. It occurs when there are fewer trades than would optimally occur, resulting in a reduction of the combined consumer and producer surplus.

market failure

occurs when markets produce a result that is inefficient from society’s point of view

monopolistic competition

a type of market structure characterized by low barriers to entry, many firms, and product differentiation

monopoly

exists when a single seller supplies the entire market for a good or service

monopoly power

a measure of a monopolist’s ability to set the price of a good or service

natural monopoly

occurs when a single large firm has lower costs than any potential smaller competitor

oligopoly

when the number of firms is small and there are high barriers to entry

price maker

has some control over the price it charges

product differentiation

the process firms use to make a product more attractive to potential customers

rent seeking

when resources are used to secure monopoly rights through the political process