Exam 1 Notes

Market Equilibrium

The natural resting point of a market where quantity supplied equals quantity demanded.

The Invisible Hand

A concept that suggests markets naturally move toward equilibrium without intervention.

Elasticity

Measures the responsiveness of one variable to changes in another.

Marginal Product

The additional output gained from one more unit of input.

Diminishing Marginal Returns

The principle that additional units of one input yield progressively smaller increases in output.

Isoquant

Different combinations of inputs that produce the same output.

Isocost Line

A line that represents different combinations of inputs that cost the same amount.

Perfect Competition

A market structure with many firms, identical products, price takers, and no barriers to entry.

MC = MR rule

A rule stating that profit is maximized when marginal cost equals marginal revenue.

Natural Monopoly

A type of monopoly that arises from economies of scale.

Price Discrimination

Charging different prices to different customers based on their willingness to pay.

Nash Equilibrium

A situation where no firm wants to change its strategy given the strategies of others.

Bertrand Competition

A model of competition where firms compete on price.

Cross-price Elasticity

Measures the responsiveness of the quantity demanded of one good to a change in the price of another good.

Average Cost Curve

A graphical representation showing the relationship between output and average cost, typically U-shaped.

Normal Goods

Goods for which demand increases as consumer income rises.

Inferior Goods

Goods for which demand decreases as consumer income rises.

Constant Returns to Scale

When doubling all inputs results in a doubling of output.

Short-run Shutdown Decision

A decision to operate if the price is greater than average variable cost; shut down if price is less.

Profit Maximization

The process of setting output where marginal revenue equals marginal cost to achieve the highest profit.

Deadweight Loss

The loss of economic efficiency that occurs when the equilibrium outcome is not achievable or not achieved.

Opportunity Cost

The cost of foregoing the next best alternative when making a decision.

Economic Profit

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

Long-run Dynamics

The adjustments in a market that occur over the long term, leading to zero economic profit.

Collusion

An agreement among firms to restrict output to increase prices and profits.