Microeconomics: Perfect Competition and Production Costs

Vocabulary flashcards covering costs of production, scales of production, and market structures in perfect competition.

Perfect Competition Profit (Graph)

The market graph sets the price and quantity for the entire industry. The firm in this graph has an ATC lower than the market price.

Perfect Competition Long Run Equilibrium (Graph)

The market graph sets the price and quantity for the entire industry. The firm in this graph has an MC, MR and ATC all intersecting at the same point to show no economic profit.

Perfect Competition Graph (Loss)

The market graph sets the price and quantity for the entire industry. The firm in this graph has an ATC higher than the market price.

Accounting Profit

Total revenue a firm receives minus its explicit costs.

Average Fixed Costs (AFC)

Fixed cost divided by the quantity of a firm's output. Decreases at decreasing rate as output rises.

Average Total Cost (ATC)

The sum of average fixed cost and average variable cost.

Average Variable Cost (AVC)

Variable cost divided by the quantity of a firm's output.

Constant Return to Scale

This exists when a firm's long-run average total cost remains constant as the firm's size increases.

Decreasing (Marginal) Returns

This happens when both total product and marginal product both decrease as an input is added to the production process.

Diseconomies of Scale

This exists when a firm's long-run average total cost increases as the firm's size increases.

Economic Profit

Accounting profit minus the opportunity cost of production.

Economies of Scale

The firm becomes more productively efficient as output rises in the long run. Also known as increasing returns to scale.

Fixed Cost

A cost that does not change as a firm's production changes. Fixed costs are incurred prior to producing even the first unit.

Long Run

The production period in which all of a firm's inputs can be varied and in which firms can enter or exit various industries.

Marginal Cost (MC)

The cost of producing an additional unit of output. Change in total cost divided by change in output.

Marginal Product

The additional output, which is produced when an additional unit of input, often labor, is added to the production process.

Normal Profit

This exists when a firm earns zero economic profit in an industry. Normal profit provides neither an incentive for firms to enter or exit the industry.

Short Run

The period of production time in which at least one input is constant.

Total Cost

The sum of fixed and variable costs. Economists include implicit costs (normal profits) as costs

Diminishing Marginal Returns

This happens when marginal product is decreasing while total product is still increasing as an input is added to the production process.

Total Product

All of a firm's output created by its inputs; synonym for quantity produced.

Variable Cost

A cost that changes with the firm's level of production.

Barriers to Entry

Anything that prohibits or discourages new firms from entering into a market.

Perfect Competition

A market condition in which buyers and sellers have no influence over price because they are small, independent firms.

Price taker

Firms in perfect competition are assumed to accept market price because they cannot control the market price for the goods they sell. Due to the number of sellers of homogenous goods.