Microeconomics: Costs and Market Structures

A set of vocabulary flashcards based on the lecture notes covering key concepts in economics, specifically costs and market structures.

Consumer Behaviour

The study of how individuals make decisions to allocate resources among various options.

Indifference Curve (IC)

A curve representing combinations of two goods that provide equal satisfaction or utility to a consumer.

Neutral Good

A good for which a consumer's utility does not change as its consumption increases or decreases, meaning their indifference curve is vertical or horizontal.

Bad (in economics)

A commodity of which the consumer would prefer less rather than more; something that decreases a consumer's utility.

Perfect Substitutes (Indifference Curves)

Goods for which the marginal rate of substitution (MRS) is constant, resulting in straight-line indifference curves.

Perfect Complements (Indifference Curves)

Goods that a consumer consumes in fixed proportions, resulting in L-shaped indifference curves.

Price Consumption Curve (PCC)

A curve that shows how a consumer's quantity demanded for a good changes as its price changes, holding other goods' prices constant.

Firm

An organization that combines inputs of labor, capital, land, and raw materials to produce outputs of goods and services.

Short Run (Production)

A period of time in which at least one input (usually capital) is fixed while others (like labor) are variable.

Long Run (Production)

A period of time long enough for all inputs, including capital, to be varied.

Marginal Product (MP)

The additional output produced as a result of using one more unit of a variable input, keeping other inputs constant.

Law of Diminishing Marginal Returns

A principle stating that as more units of a variable input are added to a fixed input, the marginal product of the variable input will eventually decline.

Total Fixed Cost (TFC)

Costs that do not vary with the quantity of output produced, such as rent and salaries.

Change in Total Fixed Cost (\Delta TFC)

The change in total fixed cost with respect to a change in output is always zero, as fixed costs do not vary with the quantity produced. Mathematically, \Delta TFC = 0. This implies that \Delta TC = \Delta TVC, which is crucial for understanding why MC = \Delta TVC / \Delta Q.

Total Variable Cost (TVC)

Costs that vary with the level of output, such as materials and labor.

Total Cost (TC)

The sum of total fixed costs and total variable costs at each level of output. Mathematically, TC = TFC + TVC.

Average Fixed Cost (AFC)

Total fixed cost divided by the quantity of output produced. Mathematically, AFC = TFC / Q.

Average Variable Cost (AVC)

Total variable cost divided by the quantity of output produced. Mathematically, AVC = TVC / Q.

Marginal Cost (MC)

The change in total cost that arises when the quantity produced changes by one unit. Mathematically, MC = \Delta TC / \Delta Q or MC = \Delta TVC / \Delta Q.

Average Total Cost (ATC)

The total cost per unit of output, calculated as ATC = \text{Total Cost} / \text{Quantity} or ATC = AFC + AVC.

Shape of TFC Curve

A horizontal line, indicating that fixed costs do not vary with the quantity of output.

Shape of TVC Curve

Starts at zero and increases with output, typically at a decreasing rate initially, then at an increasing rate.

Shape of TC Curve

Parallel to the TVC curve, starting at the level of TFC (the vertical intercept) and increasing with output.

Shape of AFC Curve

Continuously declines as output increases, approaching the horizontal axis (an asymmetric hyperbola).

Shape of AVC Curve

Typically U-shaped, initially decreasing due to increasing returns to the variable input, then increasing due to diminishing marginal returns.

Shape of ATC Curve

Also U-shaped, initially declining steeper than AVC, then rising, and intersecting MC at its minimum point.

Shape of MC Curve

Typically U-shaped, intersecting both the AVC and ATC curves at their minimum points.

Market

Any place or system where buyers and sellers interact to exchange goods and services.

Total Revenue (TR)

The total amount of money received by a firm from the sale of its output. Mathematically, TR = P \times Q.

Profit

The difference between total revenue and total cost. Mathematically, \text{Profit} = TR - TC.

Marginal Revenue (MR)

The additional revenue gained from selling one more unit of output. Mathematically, MR = \Delta TR / \Delta Q.

Profit Maximization

The process of determining the price and output level that returns the greatest profit for a firm.

Conditions for Profit Maximization

A firm maximizes profit at the output level where two conditions are met:

1. Necessary Condition: Marginal Revenue (MR) equals Marginal Cost (MC), i.e., MR = MC.
2. Sufficient Condition: At the output level where MR = MC, the Marginal Cost (MC) curve must be rising (or MC must be greater than MR for output levels immediately exceeding this point).

Profit/Loss on TC/TR Graph

Profit is maximized where the vertical distance between the Total Revenue (TR) and Total Cost (TC) curves is greatest, with TR being above TC. Losses occur when TC is above TR.

Shutdown Point

The minimum price at which a firm can cover its average variable costs and operate at a loss without incurring additional fixed costs. If price falls below AVC, the firm should shut down in the short run.

Perfect Competition

A market structure characterized by a large number of sellers and buyers, selling homogeneous goods, where no single seller has market power.

Price Taker (Perfect Competition)

A firm in a perfectly competitive market that must accept the prevailing market price for its product because it has no market power and sells a homogeneous good.

Free Entry and Exit (Perfect Competition)

The condition in a perfectly competitive market where firms can enter or leave the market without any barriers, leading to long-run economic profits of zero.

Long-Run Equilibrium in Perfect Competition

A state where new firms entering or existing firms exiting have adjusted the market supply until all firms earn zero economic profit, and P = MR = MC = ATC_{\text{min}}.

Profit Maximization in Perfect Competition

Achieved when a firm produces at the output level where Price equals Marginal Cost, i.e., P = MC, because in perfect competition, P = MR.

Monopoly

A market structure where a single seller dominates the market and has significant control over prices.