Microeconomics Lecture Terms

A comprehensive set of vocabulary flashcards covering fundamental microeconomic concepts, market structures, game theory, and externalities based on the lecture notes.

Economic Profit

Total Revenue minus explicit and implicit costs.

Normal Profit

Zero economic profit; firm covers all opportunity costs.

Supernormal Profit

Positive economic profit.

Short Run

At least one input is fixed.

Long Run

All inputs are variable.

Marginal Product

Extra output from one more unit of labour.

Law of Diminishing Marginal Returns

Marginal product eventually falls as more labour is added to fixed capital.

Fixed Cost

Cost that does not vary with output.

Variable Cost

Cost that changes with output.

Marginal Cost

Extra cost of producing one more unit.

Average Cost

Total cost divided by output.

Economies of Scale

Average cost falls as output rises.

Diseconomies of Scale

Average cost rises as output rises.

Nash Equilibrium

Each player is choosing a best response to others.

Dominant Strategy

Best strategy regardless of rival's action.

Dominated Strategy

Always worse than another strategy.

Prisoner's Dilemma

Dominant strategies lead to a Pareto-inferior outcome.

Pareto Improvement

Makes at least one person better off without hurting others.

Subgame Perfect Nash Equilibrium

Equilibrium found by backward induction.

Price Taker

Firm accepts market price.

Perfect Competition Assumptions

Many buyers/sellers, homogeneous product, free entry/exit, full information.

Reason for $MR = P$ in Perfect Competition

Each extra unit sells at market price.

Profit Maximisation Rule

$$MR = MC$$

Competitive Equilibrium

$$P = MR = MC$$

Shutdown Point

Minimum $AVC$

When Does a Firm Shut Down?

When $P < AVC$

Short Run Supply Curve

$MC$ above minimum $AVC$

Long Run Competitive Equilibrium

$P = \text{minimum } LRAC$ and firms earn normal profit.

Monopoly

Single seller with barriers to entry.

Reason for $MR < P$ for Monopoly

Must lower price to sell more output.

Monopoly Profit Maximisation

$$MR = MC$$

Monopoly Pricing Rule

Use demand curve at profit-maximising quantity.

Socially Optimal Output

$$P = MC$$

Deadweight Loss

Lost surplus from inefficiently low output.

Price Discrimination

Charging different prices for the same product.

Monopolistic Competition

Many firms selling differentiated products.

Long Run Monopolistic Competition

$MR = MC$ and $P = AC$

Excess Capacity

Producing below minimum $AC$

Four Firm Concentration Ratio

Market share of four largest firms.

HHI Formula

Sum of squared market shares.

Oligopoly

Few dominant firms with interdependence.

Cartel

Firms collude and act like a monopoly.

Why Cartels Fail

Members have incentive to cheat.

Externality

Cost or benefit imposed on third parties.

Negative Externality

External cost imposed on others.

Marginal Social Cost

$$MPC + MEC$$

Coase Theorem

Low transaction costs + property rights $\rightarrow$ bargaining yields efficiency.

Public Good

Non-rival and non-excludable.

Free Rider Problem

Benefit without contributing.

Tragedy of the Commons

Overuse of common resources due to lack of ownership.