AP Econ Unit 5

Comprehensive vocabulary flashcards covering the costs of production, perfectly competitive markets, monopolies, oligopolies, and monopolistic competition.

Total Revenue

The amount a firm receives for the sale of its output, calculated as $\text{Total revenue} = P \times Q$.

Total Cost

The market value of the inputs a firm uses in production.

Profit

Total revenue minus total cost ($\text{Profit} = \text{TR} - \text{TC}$).

Explicit Costs

Input costs that require an outlay of money by the firm.

Implicit Costs

Input costs that do not require an outlay of money by the firm.

Economic Profit

Total revenue minus total cost, including both explicit and implicit costs.

Accounting Profit

Total revenue minus total explicit cost.

Production Function

The relationship between the quantity of inputs used to make a good and the quantity of output of that good.

Marginal Product

The increase in output that arises from an additional unit of input.

Diminishing Marginal Product

The property whereby the marginal product of an input declines as the quantity of the input increases.

Fixed Costs

Costs that do not vary with the quantity of output produced.

Variable Costs

Costs that do vary with the quantity of output produced.

Average Total Cost (ATC)

Total cost divided by the quantity of output ($\text{ATC} = \frac{\text{TC}}{Q}$).

Average Fixed Cost (AFC)

Fixed costs divided by the quantity of output ($\text{AFC} = \frac{\text{FC}}{Q}$).

Average Variable Cost (AVC)

Variable costs divided by the quantity of output ($\text{AVC} = \frac{\text{VC}}{Q}$).

Marginal Cost (MC)

The increase in total cost that arises from an extra unit of production ($\text{MC} = \frac{\Delta \text{TC}}{\Delta Q}$).

Efficient Scale

The quantity of output that minimizes average total cost.

Economies of Scale

The property whereby long-run average total cost falls as the quantity of output increases.

Diseconomies of Scale

The property whereby long-run average total cost rises as the quantity of output increases.

Constant Returns to Scale

The property whereby long-run average total cost stays the same as the quantity of output changes.

Competitive Market

A market with many buyers and sellers trading identical products so that each buyer and seller is a price taker.

Average Revenue

Total revenue divided by the quantity sold ($\text{AR} = \frac{\text{TR}}{Q}$).

Marginal Revenue

The change in total revenue from an additional unit sold ($\text{MR} = \frac{\Delta \text{TR}}{\Delta Q}$).

Shutdown

The short-run decision not to produce anything during a specified period of time because of current market conditions.

Exit

A long-run decision to leave the market.

Sunk Cost

A cost that has been committed and cannot be recovered.

Monopoly

A firm that is the sole seller of a product without close substitutes.

Natural Monopoly

A monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms.

Antitrust Laws

A collection of statutes that give the government the authority to control markets and promote competition.

Sherman Antitrust Act

Statute passed in 1890 to lower the market power of the large and powerful 'trusts' that were viewed as dominating the economy at that time.

Clayton Act

Statute passed in 1914 that strengthened the government's ability to curb monopoly power and authorized private lawsuits.

Price Discrimination

The business practice of selling the same good at different prices to different customers.

Perfect Price Discrimination

A situation where a monopolist knows exactly the willingness to pay of each customer and can charge each customer a different price.

Oligopoly

A market structure in which only a few sellers offer similar or identical products.

Monopolistic Competition

A market structure in which many firms sell products that are similar but not identical.

Duopoly

An oligopoly with only two members.

Collusion

An agreement among firms in a market about quantities to produce or prices to charge.

Cartel

A group of firms acting in unison.

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.

Output Effect

In an oligopoly, the effect where increasing output increases profit because price is greater than marginal cost ($P > \text{MC}$).

Price Effect

In an oligopoly, the effect where increasing output raises the total quantity sold, causing the price to fall and lowering profit.

Game Theory

The study of how people behave in strategic situations.

Prisoners' Dilemma

A particular 'game' between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial.

Dominant Strategy

A strategy that is best for a player in a game regardless of the strategies chosen by the other players.

Resale Price Maintenance

A restriction by a manufacturer on the price that sellers can charge for a product, usually used to keep the price from being lower at one retailer than another.

Excess Capacity

The condition under monopolistic competition where a firm produces a quantity of output that is smaller than the quantity that minimizes average total cost (the efficient scale).

Product-Variety Externality

The positive externality that occurs because as new firms enter a monopolistically competitive market, consumers get some consumer surplus from the introduction of a new product.

Business-Stealing Externality

The negative externality that occurs because as new firms enter a monopolistically competitive market, existing firms lose customers and profit.