Costs of Production and Perfect Competition

Flashcards to help review key concepts related to costs of production and perfect competition.

Total Cost (TC)

The total economic cost of production, calculated as the sum of fixed costs (FC) and variable costs (VC).

Variable Cost (VC)

Costs that change with the level of output produced, such as materials and labor that can vary in the short run.

Fixed Cost (FC)

Costs that do not change with the level of output, such as rent or salaries that must be paid regardless of production.

Average Total Cost (ATC)

Total cost per unit of output, calculated by dividing the total cost (TC) by the quantity of output produced.

Marginal Cost (MC)

The additional cost incurred by producing one more unit of a good or service.

Average Variable Cost (AVC)

Variable cost per unit of output, calculated as the variable cost (VC) divided by the quantity produced.

Shutdown Point

The level of output where the firm covers its variable costs but not its fixed costs; if the price falls below AVC, the firm should shut down.

Profit Maximization Point

The level of output where marginal revenue (MR) equals marginal cost (MC), maximizing the firm’s profit.

Perfect Competition

A market structure characterized by a large number of small firms, homogeneous products, and free entry and exit in the market.

Market Equilibrium

The point at which the quantity of good supplied is equal to the quantity demanded, determining the market price.

Price Taker

Firms in a perfectly competitive market that cannot influence the market price and must accept it as given.

Long-Run Equilibrium

A condition in which all firms in a market earn no economic profit, meaning total revenue equals total cost.

Economic Profit

When total revenue exceeds total cost, leading to excess profits over normal profit.

Normal Profit

The level of profit necessary to keep a company in business; occurs when total revenue equals total cost.

Demand Curve (D)

A graphical representation showing the relationship between the price of a good and the quantity demanded.

Supply Curve (S)

A graphical representation showing the relationship between the price of a good and the quantity supplied.

Consumer Surplus

The difference between what consumers are willing to pay for a good and what they actually pay; measures consumer benefit.

Tariff

A tax imposed on imported goods, usually to raise revenue or protect domestic industries.