ECN 201 Exam 2: Production, Cost, and Market Structures

Comprehensive vocabulary flashcards covering production theory, cost curves, perfect competition, monopoly, oligopoly, game theory, and monopolistic competition from the ECN 201 Exam 2 Study Guide.

Marginal Product of Labor ($\text{MPL}$)

The extra output produced from adding one more worker, calculated as $\Delta Q / \Delta L$.

Average Product of Labor ($\text{APL}$)

The total output divided by the quantity of labor employed, calculated as $Q / L$.

Diminishing Marginal Product

The principle that as more of a variable input is added to a fixed input, each additional unit of the variable input eventually adds less output.

Fixed Cost ($\text{FC}$)

Production costs that do not change with the quantity of output produced, such as payments for machines.

Variable Cost ($\text{VC}$)

Production costs that vary with the quantity of output produced, such as wages paid to workers.

Total Cost ($\text{TC}$)

The sum of all costs incurred to produce a given output, given by $\text{TC} = \text{FC} + \text{VC}$.

Marginal Cost ($\text{MC}$)

The cost of producing one additional unit of output, calculated as $\Delta \text{TC} / \Delta Q$.

Average Total Cost ($\text{ATC}$)

The total cost per unit of output, calculated as $\text{TC} / Q$ or $\text{AFC} + \text{AVC}$.

Average Fixed Cost ($\text{AFC}$)

Fixed cost per unit of output, calculated as $\text{FC} / Q$, which always declines as output increases.

Average Variable Cost ($\text{AVC}$)

Variable cost per unit of output, calculated as $\text{VC} / Q$.

Cost-Minimizing Input Rule

The condition where the marginal product per dollar is equal across inputs: $\frac{\text{MPL}}{\text{PL}} = \frac{\text{MPK}}{\text{PK}}$.

Increasing Returns to Scale

A long-run production condition where doubling all inputs causes output to more than double.

Constant Returns to Scale

A long-run production condition where doubling all inputs causes output to exactly double.

Decreasing Returns to Scale

A long-run production condition where doubling all inputs causes output to less than double.

Economies of Scale

A condition where long-run average cost ($\text{LRAC}$) falls as output expands, often due to specialization and mass production.

Diseconomies of Scale

A condition where long-run average cost ($\text{LRAC}$) rises as output expands, often caused by management and coordination problems.

Price Taker

A firm in a competitive market that cannot influence the market price and must accept the going market price, facing a perfectly horizontal demand curve.

Accounting Profit

Total revenue minus explicit (cash) costs.

Economic Profit

Total revenue minus explicit costs minus opportunity costs.

Sunk Cost

A cost that has already been paid and cannot be recovered; it should be ignored in short-run production decisions.

Opportunity Cost

The value of the best alternative that is given up when making a decision.

Shutdown Price

The market price below which ($P < \text{AVC}$) a firm will temporarily stop production in the short run.

Efficient Scale

The quantity of output that minimizes average total cost ($\text{ATC}$).

Price Setter

A firm that possesses monopoly power and chooses the price at which to sell its product.

Output Effect

The positive revenue effect for a monopolist that occurs because one additional unit is sold.

Price Effect

The negative revenue effect for a monopolist that occurs because the price must be lowered on all units to sell one more.

Deadweight Loss

The lost economic value of mutually beneficial trades that do not take place due to market power or distortions.

Natural Monopoly

An industry where a single firm can supply the entire market at a lower average total cost than two or more firms, characterized by large fixed costs and low marginal costs.

Price Discrimination

The practice of charging different prices to different buyers for the same good based on differences in willingness to pay.

Perfect Price Discrimination

Charging each consumer their exact willingness to pay, eliminating deadweight loss and transferring all consumer surplus to the producer.

Oligopoly

A market structure characterized by a few large interdependent firms, high barriers to entry, and identical or similar products.

Cartel

A formal agreement among competing firms to collude by restricting output and raising prices to act like a monopolist.

Dominant Strategy

In game theory, a strategy that yields the best outcome for a player regardless of the strategy chosen by the rival player.

Nash Equilibrium

An outcome in game theory where each player chooses their best reply given the choices of all other players, leaving no incentive to change strategies.

Monopolistic Competition

A market structure characterized by many sellers, differentiated products, free entry and exit, and zero economic profit in the long run.

Product Differentiation

The process of distinguishing a product via advertising, location, quality, or reputation to make its demand curve more inelastic and gain pricing power.