\ the amount of the total tax revenue that is paid for by the consumers and/or producers.
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Asymmetric information
\ when either the buyer or seller has more information than the other and so can make a large profit.
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Monopoly
\ is when one firm dominates a market.
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Monopoly power
\ is when a firm has some control over the price; and so society experiences a welfare loss.
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Short run
\ is when at least one factor of production is fixed.
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Long run
\ is when all factors of production vary.
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Total product
\ is the quantity produced as more labour is added to a production process
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Average product
\ is the quantity produced per unit of labour; total product divided by quantity of labour.
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Marginal product
is the additional production that an additional unit of labour produces; the change in total product divided by the change in labour (first derivative of total product).
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Diminishing marginal returns
\ is the fact that the marginal product falls as production increases; resulting in increased cost of production (and an upward sloping supply curve).
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Economic cost
\ is the cost of land, labour and capital in the production process.
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Explicit cost
\ the actual cost of production; the cost of using labour, capital and land.
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Implicit cost
\ is the opportunity cost of using factors of production that a firm already has; this always includes entrepreneurship (may include capital).
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Fixed cost
\ is the cost of the factor(s) of production that are fixed in the short run (usually the cost of capital).
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Variable cost
\ is the factor(s) of production that are not fixed in the short run (usually the cost of land and labour).
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Total cost
\ is the cost of land, labour and capital at any given level of production
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Average cost
\ is the total cost per unit of production; the total cost divided by the quantity produced.
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Marginal cost
\ is the additional cost of producing one more (the last) unit of production; the change in total cost divided by the change in production (the first derivative of the total cost - the firm’s supply function)
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Returns to scale
\ is the relationship between the level of production and factors of production in the long run.
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Increasing returns to scale
\ is when an increase in all factors of production increases the level of production by a greater proportion in the long run.
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Constant returns to scale
\ is when an increase in all factors of production increases the level of production by the same proportion in the long run.
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Diminishing returns to scale
\ is when an increase in all factors of production increases the level of production by a lesser proportion in the long run.
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Total revenue
the income of the firm from sales
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Average revenue
the total revenue per unit sold
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Marginal revenue
the additional revenue gained from selling one more unit
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Normal profit
the minimum amount of profit necessary to keep the entrepreneur going and so the firm operating
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Economic profit (abnormal or supernormal)
any profit greater than normal profit.
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Perfect competition
when many small firms operate in a market with many consumers so the firms are price takers and there are no externalities, no economies of scale, homogenous products and perfect knowledge.
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Price taker
when a firm has no control over the price in a market and faces a perfectly elastic average revenue (or demand) function. Break-even price
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Shut-down price
the price at which a firm can only pay for variable costs: total revenue equals variable costs (quantity where average variable cost equals average revenue: AVC \= AR)
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Allocative efficiency
the quantity at which price equals marginal cost: price
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Monopoly
when one firm dominates a market with no close substitutes and high barriers to entry
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Barriers to entry
the cost (research and development, marketing etc.) or other barriers (legal barriers) that stop competing firms from entering a market.
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Non-price competition
when firms compete on quality or design of a product rather than price
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Oligopoly
when a few firms dominate a market.
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a perfect monopoly
when 1 firm has 100% of the market and in an oligopoly the largest 5 firms may have 85% of the market.
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Game theory
when firms use a matrix theory (maths) in order to take into account other firms’ operations and maxim
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Formal (open) collusion
when firms in an oligopoly meet to set prices or levels of production and so control the market like a monopoly: OPEC
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Informal (tacit) collusion
when firms follow unwritten rules (price leadership of a dominant firm) in order to set prices or levels of production and so operate as a monopoly
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Price discrimination
\ is when a firm sells exactly the same product at different prices to different consumers
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