ECON 251-H - Midterm Exam 2 Study Guide

Key Terms

competitive markets

markets that have enough buyers and sellers as well as available information such that market prices are not chosen, but set by the market

neo-classical assumptions

The traditional view of markets which holds that consumers
maximize utility, producers maximize profits, and individuals are in pursuit of their own rational self-interest

the producer’s problem

to maximize profits relative to market prices and costs

profits

total revenue minus total cost

production function

a mathematical representation of a firm's ability to use capital and
labor to make a final good

capital

physical inputs used in production of goods and services

labor

the human effort required in the production of goods and services

inputs

the capital and labor units used in production of a firm’s output

quantity produced

the amount of a good or service brought to market by a firm relative to the market price and the firm's costs.

capital intensity

the extent to which a firm’s production function relies on capital inputs

labor intensity

The extent to which a firm's production function relies on labor inputs

The Supply Chain

The entire process from resource extraction to retail sale that maps the life-cycle of a good or service

returns to scale

Extent to which a firm can increase its production of a single good and change its average cost

returns to scope

The extent to which a firm can increase its production of different goods to change its average cost

vertical integration

The process of a firm integrating with another firm that is upstream or downstream within the same supply chain

horizontal integration

The process of a firm integrating with another firm that is a
competitor

total cost

the total expenditure relative to an amount of quantity produced

total revenue

the amount of economic returns that flow to firms when they sell goods or services

marginal revenue

the incremental change in total revenue when a firm sells one
additional unit of its good or service

marginal cost

The incremental change in total cost when a firm produces one additional unit of its good or service

variable cost

costs that change relative to how much a firm produces

fixed cost

costs that do not change regardless of how much a firm produces

barrier to entry

costs or some other economic issue that reduces the likelihood of other firms entering a market

Willingness to Accept

the reservation price of a firm which details the minimum
acceptable price they will require for their good or service

Cost Minimization

A form of profit maximization that relies on bringing costs down as
much as possible

The Supply Curve

A schedule of prices and their relative quantity produced

marginal cost pricing

In competitive markets firms will typically sell their products for
how much it cost them to produce their last unit

market equilibrium

the point in a market where supply equals demand and the market
clears

equilibrium price

the subsequent price produced by market equilibrium

equilibrium quantity

the subsequent quantity produced by market equilibrium

producer surplus

the added value that flows to producers who are able to sell their
product for more than their minimum willingness to accept

price elasticity of supply

extent to which changes in a good’s price will lead to changes in
quantity supply in a market

The Invisible Hand

the notion that market forces efficiently push and pull capital and labor about the economy.

Creative Destruction

the idea that old inefficient industries give way to new efficient industries over time.

Structural Unemployment

unemployment that arises when the skills of workers do not align with the skills demanded by firms.

Unemployment Assistance

a form of government intervention that seeks to soothe the problem of structural unemployment.

Market Power

when a firm or firms have some significant effect over market prices and markets themselves.

Partial Equilibrium

analysis that considers the equilibrium effects of a single market.

General Equilibrium

analysis that considers the equilibrium effects across many markets that are interdependent.

Capital Market

the market for physical inputs used in production.

Business Fixed Investment

the act of purchasing and/or financing capital for use in production or expansion of existing productive capacity.

Labor Market

the market for employees.

Human Capital

the skills that workers derive from education, training, and/or experience

Physical Capital

capital that is made by humans.

Natural Capital

capital that is naturally occurring in nature.

Financial Capital

financing of capital purchases.

Rental Rate of Capital

the market price of capital inputs.

Depreciation

the process by which a unit of capital has its value diminished overtime from use and technological advancement.

Marginal Product of Capital

the incremental increase in production that arises from using one additional unit of capital.

Labor Demand

the employer side of the labor market.

Labor Supply

the employee side of the labor market.

Marginal Product of Labor

the incremental increase in production that arises from employing one additional unit of labor.

Market Wage

the equilibrium wage rate set by competitive labor market.

Competition

the process by which firms lose the ability to pick prices.

Monopoly

an economic market that only has one firm.

Monopsony

an economic market that only has one consumer.

Rent Extraction

the process by which firms are able to extract consumer surplus by picking prices.

Perfect Competition

a market that has many buyers and many sellers, perfect information, free entry and exit, and whose firms sell virtually the same good or service

Competitive Barrier

a feature of a product (or the firm that sells it) that reduces the ability of other firms to enter the market.

Product Differentiation

the process by which firms make their products distinct from their competitors.

Brand Loyalty

the notion that consumers have preferences for particular firms.

Price Signals

when markets set prices they send information to other markets and the economy.

Short-run Total Cost

in the short run firms have both variable cost and fixed cost.

Long-run Total Cost

in the long run all costs become fixed.

Perfect Elasticity of Demand

when firms face a demand curve that is horizontal and are unable to raise or lower their price to maximize profits.

Shut-down Price

the price at which a firm would do better by stopping production instead of producing.

Break-even Price

the price at which a firm makes zero profit.

Long-run Zero Profit Condition of Competitive Markets

according to theory, firms in
competitive markets will see their profits competed down to zero in the long run due to free entry and exit, perfect information, and homogeneous goods.

Resource Procurement

the process by which inputs are extracted from the environment.

Lobbying

when firms spend money to influence policy decisions.

Spatial Advantage

when a firm takes advantage of a barrier to entry due to its location.

Anti-trust Laws

laws in the United States meant to reduce market power.

Market Failure

when a free market fails to achieve economic and/or social efficiency.

Contested Monopoly

a monopoly that arises from competitive forces.

Natural Monopoly

a monopoly that arises from the extreme cost of resource procurement.

Price Discrimination

when a firm charges different prices to different consumers.

First Degree Price Discrimination

the ability of a firm to charge each customer exactly their reservation price.

Second Degree Price Discrimination

the ability of a firm to charge customers based on the level of their consumption.

Third Degree Price Discrimination

the ability of a firm to charge different prices to different types of consumers based on tangible differences.

Monopolistic Competition

a type of market defined by many buyers and many sellers, perfect information, free entry and exit, but differentiated goods

Oligopolies

a type of market defined by only a few sellers.

Market Share

the extent to which a single firm controls a particular portion of the market.

Market Concentration

the extent to which a market is controlled by one or more firms.

Mergers and Acquisitions

the process by which firms go from competitors to become a single firm.

Collusion

the act of two supposedly competing firms who share information and/or make decisions jointly.

Cartels

a collection of firms who are colluding.