Microeconomics HL Defintions

Incidence of taxation

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the amount of the total tax revenue that is paid for by the consumers and/or producers. 

Asymmetric information

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when either the buyer or seller has more information than the other and so can make a large profit. 

Monopoly

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 is when one firm dominates a market. 

Monopoly power

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 is when a firm has some control over the price; and so society experiences a welfare loss. 

Short run

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is when at least one factor of production is fixed.  

Long run

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 is when all factors of production vary.

Total product

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is the quantity produced as more labour is added to a production process 

Average product

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is the quantity produced per unit of labour; total product divided by quantity of labour.

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

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 is the fact that the marginal product falls as production increases; resulting in increased cost of production (and an upward sloping supply curve). 

Economic cost

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is the cost of land, labour and capital in the production process. 

Explicit cost

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the actual cost of production; the cost of using labour, capital and land. 

Implicit cost

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is the opportunity cost of using factors of production that a firm already has; this always includes entrepreneurship (may include capital).

Fixed cost

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is the cost of the factor(s) of production that are fixed in the short run (usually the cost of capital). 

Variable cost

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is the factor(s) of production that are not fixed in the short run (usually the cost of land and labour). 

Total cost

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 is the cost of land, labour and capital at any given level of production

Average cost

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is the total cost per unit of production; the total cost divided by the quantity produced.

Marginal cost

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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)

Returns to scale

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is the relationship between the level of production and factors of production in the long run.

Increasing returns to scale

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is when an increase in all factors of production increases the level of production by a greater proportion in the long run. 

Constant returns to scale

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is when an increase in all factors of production increases the level of production by the same proportion in the long run.

Diminishing returns to scale

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is when an increase in all factors of production increases the level of production by a lesser proportion in the long run.

Total revenue

the income of the firm from sales

Average revenue

the total revenue per unit sold

Marginal revenue

the additional revenue gained from selling one more unit

Normal profit

the minimum amount of profit necessary to keep the entrepreneur going and so the firm operating

Economic profit (abnormal or supernormal)

any profit greater than normal profit.

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.

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

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)

Allocative efficiency

the quantity at which price equals marginal cost: price

Monopoly

when one firm dominates a market with no close substitutes and high barriers to entry

Barriers to entry

the cost (research and development, marketing etc.) or other barriers (legal barriers) that stop competing firms from entering a market.

Non-price competition

when firms compete on quality or design of a product rather than price

Oligopoly

when a few firms dominate a market.

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.

Game theory

when firms use a matrix theory (maths) in order to take into account other firms’ operations and maxim

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

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

Price discrimination

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 is when a firm sells exactly the same product at different prices to different consumers