Microeconomics Key Concepts and Market Structures

A comprehensive vocabulary review of microeconomic production concepts, costs, market structures, and regulatory mechanisms covered in the lecture notes.

Production Function

A technological relationship expressing the maximum quantity of a good attainable from different combinations of factor inputs (PPC Curve). Example: number of workers compared to how much output they produce.

Marginal Physical Product (MPP)

The change in total output associated with one additional unit of input. Calculated as: $MPP = \frac{\text{change in total output}}{\text{change in input quantity}}$.

Law of Diminishing Returns

The principle that some inputs are fixed and cannot change and some are beyond the point of production; a firm experiences declining units of additional output with each additional unit of labor input (way too many people for a limited amount of space).

Fixed Cost

Costs of production that do NOT change when the rate of output is altered. Example: rent, none in the long run.

Variable Cost

Costs of production that change when the rate of output is altered, such as labor and material costs. Example: cheese at a pizza resturant.

Marginal Cost

The increase in total costs associated with a one-unit increase in production. Calculated as: $MC = \frac{\text{change in total cost}}{\text{change in output}}$.

Economies of Scale

Reductions in minimum average costs that come about through increased scale (size) of plant and equipment, associated with natural monopolies. Example: car manufacturing, streaming services, large stores (costco, walmart).

Perfect Competition

A market in which no buyer or seller has market power, demand curve is horizontal. Example: Wheat, apples, rice.

Price Taker

A perfectly competitive firm.

Economic Profit

The difference between total revenues and total economic costs; smaller than accounting profit because more costs are subtracted. Calculated as: $EP = \text{total revenue} - \text{total economic cost}$ OR $EP = \text{accounting profit} - \text{implicit cost}$.

Profit-Maximizing Rate of Output

The amount of goods a business produces that will lead to the greatest profit, where $MR = MC$.

Shutdown Point

The point when average variable costs exceeds price.

Short-Run Supply Curve

The amount a business is willing and able to produce in the short term.

Explicit Costs

Monetary payments made for the use of resources. Example: labor services, purchase of raw materials, utility usage.

Implicit Costs

The value of resources used, where NO payment is made. Example: Anything already owned.

Long-Run Equilibrium

When businesses make zero economic profit and there is no reason for businesses to enter or exit the industry.

Zero Economic Profit

Occurs on the minimum point on the ATC when competition increases.

Allocative Efficiency

The allocation of resources among different uses so that the mix of goods and services produced matches what consumers most value. It is achieved when price equals marginal cost ($P = MC$).

Production Efficiency

Maximum output of a good from the resources used in production.

Monopoly

When there is one main firm that controls the market of that specific good or service.

Market Power

The ability of a company or entity to influence prices and control terms within its market.

Barriers to Entry

Obstacles that make it difficult or costly for new firms to enter a market or industry, which protects existing firms from competition and lets them keep higher prices and profits.

Price Discrimination

When a company charges different customers different prices for the same good or service, even though the cost of providing it is similar. Example: A movie theater charges students $8$ dollars for a ticket but adults $12$ dollars for the same movie.

Marginal Revenue

Change in total revenue resulting from the production of an additional unit of output.

Antitrust Laws

Government intervention to alter market structure or prevent abuse of market power – for example, break-up the monopoly.

Contestable Market

An imperfectly competitive industry subject to potential entry if prices or profits increase.

Natural Monopoly

An industry in which one firm can achieve economies of scale over the entire range of market supply.

opportunity cost

A condition stated in the notes where consumers are accurately informed of the true opportunity cost of various goods.

Marginal Cost Pricing

Pricing where consumers are accurately informed of the true opportunity cost of various goods.

Profit Regulation

Eliminates the need to subsidize the monopolist ($p = ATC$).

Output Regulation

Regulation establishing production where $P = MC$.