Chapter 6 Cards: Sellers and Incentives

Vocabulary covering key terms and definitions from the notes on sellers, costs, revenues, and market dynamics.

Seller's problem

The decision problem sellers face to maximize profits by deciding what to produce, how to produce, and how much to produce.

Marginal thinking

Making decisions at the margin by comparing the benefits and costs of the next unit.

Supply curve

The relationship showing a seller's willingness to sell a good at various price levels.

Producer surplus

The difference between the market price and the marginal cost curve; the area above MC and below the price.

Price-taker

In a perfectly competitive market, a firm that cannot influence the market price and takes it as given.

Perfectly competitive market

A market with many buyers and sellers, identical goods, and free entry and exit.

Free entry

No barriers to entering a market; entry increases market supply.

Free exit

No barriers to leaving a market; exit decreases market supply.

Production function

The relationship between inputs used and outputs produced.

Inputs

Resources used in production (e.g., labor, capital).

Outputs

Goods or services produced.

Short run

A period when some inputs are fixed and not all inputs can be varied.

Long run

A period when all inputs can be varied; no fixed factors.

Fixed factor of production

An input that cannot be changed in the short run (e.g., plant, equipment).

Variable factor of production

An input that can be changed in the short run (e.g., labor).

Marginal product

The additional output produced by adding one more unit of input.

Specialization

Workers develop specific skills to increase total productivity.

Law of Diminishing Returns

With more of a variable input, marginal product eventually decreases.

Fixed cost

Costs that do not vary with output in the short run.

Variable cost

Costs that vary with the level of output.

Total cost

Sum of fixed and variable costs.

Average total cost (ATC)

Total cost divided by total output.

Average variable cost (AVC)

Variable cost divided by total output.

Average fixed cost (AFC)

Fixed cost divided by total output.

Marginal cost (MC)

Change in total cost from producing one more unit.

Total revenue

Price times quantity sold; the total money earned from sales.

Revenue

Money earned from selling outputs (synonymous with total revenue in many contexts).

Profits

Revenues minus costs; the net benefit to the firm.

Accounting profits

Total revenue minus explicit costs.

Economic profits

Total revenue minus both explicit and implicit costs.

Marginal revenue (MR)

Change in total revenue from producing one more unit.

Price elasticity of supply

Measures how responsive quantity supplied is to price changes.

Elastic supply

Quantity supplied responds strongly to price changes (elasticity > 1).

Unit-elastic supply

Elasticity equals 1; a 1% price change leads to a 1% change in quantity supplied.

Perfectly elastic supply

An infinite change in quantity supplied for a tiny price change; price is fixed at a given level.

Perfectly inelastic supply

Quantity supplied does not change with price (elasticity = 0); example: fully utilized capacity.

Shutdown

A short-run decision to stop producing; fixed costs remain, variable costs are avoided.

Sunk costs

Costs that cannot be recovered once incurred and should not affect current decisions.

Economies of scale

ATC falls as output increases in the long run.

Constant returns to scale

ATC does not change as output changes in the long run.

Diseconomies of scale

ATC rises as output increases in the long run.

Long-run supply curve

In perfect competition, horizontal at the minimum ATC; price tends to the minimum ATC.

Zero economic profits

In long-run equilibrium with free entry/exit, price equals minimum ATC and econ profits are zero.

Subsidy

A payment or tax break used as an incentive for an activity.

Firm

Any business entity that produces and sells goods or services.

Production

The process of transforming inputs into outputs.

Physical capital

Non-human inputs like machines and buildings used for production.

Total cost components: VC and FC

Variable costs vary with output; fixed costs do not vary with output in the short run.

Minimum ATC

The lowest point on the ATC curve; in long-run equilibrium, price tends to this level.

Exit

Long-run decision to leave the market.

MR=MC rule

Profits are maximized where marginal revenue equals marginal cost.