Microeconomics: Market Structures, Factor Markets, Efficiency, and Public Policy

Comprehensive vocabulary flashcards covering the core economic definitions, mathematical conditions, models, and policy concepts from Chapters 9 through 18.

Breaking Even

The situation in which a firm earns exactly a normal rate of return, covering all economic costs including the opportunity cost of capital, resulting in zero economic profit.

Shutdown Point

The lowest point on the average variable cost ($AVC$) curve; if market price falls below this minimum, total revenue is insufficient to cover variable costs and the firm minimizes losses by producing zero units.

Short-Run Industry Supply Curve

The horizontal sum of the portions of marginal cost ($MC$) curves that lie above the average variable cost ($AVC$) curve for all firms in an industry.

Economies of Scale

A condition in which an increase in a firm's scale of production leads to lower average costs per unit produced (associated with increasing returns to scale in production).

Constant Returns to Scale

A condition in which an increase in a firm's scale of production has no effect on average costs per unit produced, causing the long-run average cost ($LRAC$) curve to be flat.

Diseconomies of Scale

A condition in which an increase in a firm's scale of production leads to higher average costs per unit produced (often caused by managerial and bureaucratic inefficiencies as the firm expands).

Minimum Efficient Scale (MES)

The smallest production scale or plant size at which long-run average cost ($LRAC$) reaches its minimum.

Optimal Scale of Plant

The scale of plant that minimizes long-run average cost, designated as output level $q^*$ where economies of scale end and diseconomies have not yet begun.

Long-Run Competitive Equilibrium

The market state achieved when firm entry and exit have eliminated economic profits, characterized by the condition $P = SRMC = SRAC = LRAC$ with profits equal to zero.

External Economies

Decreases in firms' long-run average costs that occur as a result of overall industry expansion.

External Diseconomies

Increases in firms' long-run average costs that occur as a result of overall industry expansion (such as rising input prices when an expanding industry demands more specialized resources).

Long-Run Industry Supply Curve (LRIS)

A curve that traces out the relationship between market price and total industry output over time as the industry expands.

Decreasing-Cost Industry

An industry in which average costs fall as the industry expands, exhibiting external economies and a downward-sloping long-run industry supply curve ($LRIS$).

Increasing-Cost Industry

An industry in which average costs rise as the industry expands, exhibiting external diseconomies and an upward-sloping long-run industry supply curve ($LRIS$).

Constant-Cost Industry

An industry that exhibits no external economies or diseconomies as it grows, resulting in a horizontal, flat long-run industry supply curve ($LRIS$).

Derived Demand

The demand for resources (inputs) that is dependent on the demand for the final outputs those resources are used to produce.

Marginal Revenue Product (MRP)

The additional revenue a firm earns by employing one additional unit of an input, ceteris paribus; calculated as $MRP = MP \times P_X$.

Pure Rent

The return earned by a factor of production whose supply is completely fixed and perfectly inelastic (such as land), meaning its price is determined exclusively by demand.

Capital

Goods produced by the economic system that are used as inputs to produce other goods and services in the future, providing productive services over time.

Social Capital (Infrastructure)

Capital that provides services to the public, primarily taking the form of public works (such as roads and bridges) and public services (such as police and fire protection).

Human Capital

A form of intangible capital that includes the skills, education, and knowledge workers acquire through schooling and training that yield productive services to a firm over time.

Capital Stock

For a single firm, the current market value of plant, equipment, inventories, and intangible assets, measured at a specific point in time.

Investment

New capital additions to a firm's capital stock, measured as a flow over a period of time.

Present Discounted Value (PDV)

The current value of a stream of future payments discounted at an interest rate ($r$); calculated using the formula $PDV = \frac{\$x}{(1 + r)^t}$.

Risk Premium

The additional return an investor requires to compensate for taking on the uncertainty and risk of future payments.

Internal Rate of Return (IRR)

The discount rate that equates the present value of an investment's future cash flows to the initial cost, setting net present value to zero.

Financial Intermediaries

Institutions (such as banks, insurance companies, and pension funds) that stand between household savers and borrowing firms to channel savings into investment.

Dividend

The portion of a corporation's net income or profits that is distributed directly to shareholders each period.

Retained Earnings

Profits that a corporation keeps and reinvests directly into new capital assets rather than distributing them to shareholders as dividends.

Capital Gain

The financial gain realized when an asset or share of stock increases in value above its purchase price.

Partial Equilibrium Analysis

The process of examining the equilibrium conditions in individual markets and for individual households and firms in isolation.

General Equilibrium

The condition that exists when all individual markets across an entire economy are in simultaneous equilibrium, accounting for feedback effects among them.

Pareto Efficiency

A condition in which no reallocation of resources or change is possible that will make some members of society better off without making at least one member worse off.

Market Failure

The inefficient allocation of resources that results in net economic waste or lost societal surplus.

Oligopoly

A market structure dominated by a small number of large firms whose individual sizes allow them to influence market price and whose strategic decisions are interdependent.

Five Forces Model

A framework developed by Michael Porter analyzing industry profitability and competition through five competitive forces: rivalry among existing firms, potential entrants, substitutes, buyers, and suppliers.

Concentration Ratio

A measure of market concentration indicating the percentage of total industry shipments, sales, or output accounted for by the largest firms (commonly the top 4 or top 8).

Contestable Markets

Markets in which entry and exit are sufficiently costless and easy that the mere threat of potential entry forces existing firms to keep prices competitive.

Cartel

A formal group of firms that coordinates price and output decisions collectively to maximize joint profits, behaving similarly to a monopoly.

Tacit Collusion

Price coordination or output restraint among competing firms that occurs without any formal or explicit agreement (e.g., following an established price leader).

Price Leadership

An oligopoly model in which a dominant firm sets the market price and allows fringe, smaller competitors to supply all they wish at that price, producing the residual output itself.

Predatory Pricing

The illegal practice of temporarily setting prices artificially low (often below average variable costs) to drive competitors out of business with the expectation of raising prices later.

Cournot Model

An oligopoly model where firms independently choose output levels simultaneously, treating rival output as fixed, with equilibrium occurring at the intersection of their reaction functions.

Dominant Strategy

In game theory, a strategy that yields the best possible payoff for a player regardless of what strategy the rival chooses.

Prisoners' Dilemma

A game in which each player has an individual dominant strategy, but when both pursue their dominant strategies, they arrive at an outcome worse than if they had cooperated.

Nash Equilibrium

An outcome in game theory in which each player chooses their best strategy given the actual strategy chosen by every other player, such that no player has an incentive to deviate unilaterally.

Maximin Strategy

A risk-minimizing game theory strategy in which a player identifies the worst possible payoff for each alternative and chooses the strategy that provides the best worst-case outcome.

Tit-for-Tat Strategy

A repeated-game strategy in which a player starts by cooperating and subsequently mimics the opponent's previous move, punishing defections and rewarding cooperation.

Herfindahl-Hirschman Index (HHI)

A quantitative measure of market concentration calculated by summing the squares of the percentage market shares of all firms in an industry: $HHI = s_1^2 + s_2^2 + \dots + s_n^2$.

Monopolistic Competition

A market structure characterized by many small firms, free entry and exit in the long run, and differentiated products, giving firms limited pricing power.

Horizontal Differentiation

Product differences that make a good superior for some consumers and inferior for others based purely on individual tastes and preferences rather than objective quality.

Vertical Differentiation

Product differences that make a good objectively superior to rivals in the eyes of all consumers (though generally accompanied by higher production costs and prices).

Commitment Device

An action taken by an individual in the present period to constrain, influence, or control their own choices and behavior in a future period.

Marginal Social Cost (MSC)

The total cost to society of producing an additional unit of a good, calculated as the sum of private marginal cost ($MC$) and marginal external cost ($MSC = MC + \text{Marginal External Cost}$).

Coase Theorem

The economic proposition that private parties can negotiate an efficient solution to an externality without government intervention, provided property rights are clearly assigned and transaction costs are low.

Public Goods

Goods characterized by being both nonrival in consumption and nonexcludable in access.

Nonrival in Consumption

A characteristic of a good whereby one individual's consumption of its benefits does not reduce the quantity or quality available for others to consume.

Nonexcludable

A characteristic of a good whereby once it is provided, people cannot easily or economically be prevented from enjoying its benefits even if they do not pay.

Free-Rider Problem

The incentive individuals have to withhold payment for a nonexcludable public good because they can enjoy its benefits without contributing to its cost.

Drop-in-the-Bucket Problem

The reluctance of individuals to contribute voluntarily to a public good because each person's single contribution is tiny relative to the total cost and seems negligible to the outcome.

Tiebout Hypothesis

The economic theory that an efficient mix of local public goods is achieved when households 'vote with their feet' by moving to communities whose tax rates and public amenities best match their preferences.

Common Resource

A resource that is nonexcludable (difficult to prevent access to) but rival in consumption, creating incentives for individual overuse and environmental depletion.

Expected Value (EV)

The probability-weighted average of all possible financial payoffs of an uncertain event: $EV = \sum (\text{Payoff} \times \text{Probability})$.

Fair Game

A gamble or bet whose expected monetary payoff equals zero ($EV = \$0$).

Expected Utility (EU)

The sum of the utility values associated with each possible outcome of an uncertain event, weighted by the probability of each outcome occurring: $EU = \sum P_i \times U_i$.

Risk-Averse

The attitude of an individual who prefers a certain payoff over an uncertain gamble with an equal expected value, stemming from diminishing marginal utility of income.

Asymmetric Information

A market situation where one party to a transaction possesses relevant, critical information that the other party does not have access to.

Adverse Selection

A market failure caused by hidden information prior to a transaction, wherein asymmetric information leads to high-risk individuals or low-quality goods disproportionately dominating the market.

Market Signaling

Actions taken by an informed party to communicate otherwise unobservable quality to an uninformed party; it is effective only if acquiring the signal is less costly for high-quality types than low-quality types.

Moral Hazard

A situation where an individual changes their behavior to take on greater risk after entering a contract (such as insurance) because the associated costs are passed onto another party.

Market Income

The total wage and property income received by a household before accounting for government transfer payments and before the deduction of income taxes.

Lorenz Curve

A graphical representation of income distribution plotting the cumulative percentage of households against the cumulative percentage of income they receive.

Gini Coefficient

A numerical measure of income inequality derived from the Lorenz curve, calculated as the ratio of the area between the Lorenz curve and the $45^\circ$ line of perfect equality to the total area under the $45^\circ$ line.

Compensating Differentials

Wage differentials that arise across occupations to compensate workers for undesirable, hazardous, or costly working conditions.

Utilitarian Justice

The ethical theory asserting that redistributing income from wealthy individuals to poorer individuals increases total societal utility because the marginal utility of income diminishes as income rises.

Rawlsian Justice

A theory of distributional justice positing that social contracts formulated behind a 'veil of ignorance' should select an income distribution that maximizes the well-being of the worst-off member of society.

Earned Income Tax Credit (EITC)

A targeted, refundable tax credit in the federal income tax system that supplements the income of low-income working families and provides incentives for labor force participation.

Official Poverty Line

The established federal income threshold defining poor households in the United States, set at three times the cost of the Department of Agriculture's minimum food budget.