Understanding Market Structures and Economic Principles

Production Function

Relationship between inputs used and output produced.

Fixed Input

Input quantity remains constant over time.

Variable Input

Input quantity can be changed anytime.

Long Run

Period when all inputs can be varied.

Short Run

Period when at least one input is fixed.

Total Product Curve

Shows output quantity based on variable input.

Marginal Product

Additional output from one more unit of input.

Marginal Product of Labor (MPL)

Change in output from one additional labor unit.

Diminishing Returns

Increased input reduces marginal product.

Fixed Cost

Cost that does not change with output level.

Variable Cost

Cost that varies with output level.

Total Cost

Sum of fixed and variable costs.

Marginal Cost

Change in total cost from one additional output.

Average Total Cost (ATC)

Total cost per unit of output produced.

Average Fixed Cost (AFC)

Fixed cost per unit of output produced.

Average Variable Cost (AVC)

Variable cost per unit of output produced.

Spreading Effect

Lower average fixed cost with increased output.

Diminishing Returns Effect

Higher average variable cost with increased output.

Minimum-Cost Output

Output level where average total cost is lowest.

Marginal Cost Curve

Graph showing change in cost per additional output.

Average Total Cost Curve

Graph showing relationship between output and ATC.

Short-Run Costs

Costs where at least one input is fixed.

Long-Run Costs

Costs where all inputs can be varied.

Trade-off in Costs

Balancing fixed and variable costs for output.

Swoosh Shape

Typical shape of marginal cost curves.

Total Cost Curve

Graph showing total cost as output increases.

MPL Decline

Marginal product decreases with more labor employed.

Cost Curves Intersection

Marginal cost intersects average total cost curve.

Point A

Firm reduces fixed costs to produce 3 cases.

Point B

Firm produces only 3 cases and moves here.

Returns to Scale

Relationship between output and average total cost.

Increasing Returns to Scale

Average total cost declines as output increases.

Decreasing Returns to Scale

Average total cost increases as output increases.

Constant Returns to Scale

Average total cost remains constant as output increases.

Minimum Efficient Scale

Output level where economies of scale end.

Economies of Scale

Cost advantages as firms grow larger.

Diseconomies of Scale

Cost disadvantages as firms grow larger.

Organizational Diseconomies

Rising costs due to complex hierarchies.

Monopolist

Only producer of a good with no substitutes.

Monopoly

Industry controlled by a single monopolist.

Market Power

Ability to raise prices above competitive levels.

Barriers to Entry

Obstacles preventing new firms from entering market.

Natural Monopoly

Single firm serves market efficiently at low cost.

Closed Monopoly

Protected from competition by legal restrictions.

Open Monopoly

Sole supplier without special protection against competition.

Technological Superiority

Consistent advantage in technology over competitors.

Network Externality

Value increases as more users adopt a service.

Government-Created Barriers

Patents and copyrights protect inventors' rights.

Profit-Maximizing Rule

Maximize profit where marginal revenue equals marginal cost.

Marginal Revenue (MR)

Change in total revenue from selling one more unit.

Price Effect

Revenue increases by price of additional unit sold.

Price Effect

Total revenue decreases due to lower market price.

Demand Curve

Graph showing relationship between price and quantity demanded.

Total Revenue

Total income from sales of goods or services.

Monopolist's Profit-Maximizing Output

Quantity where MR curve intersects MC curve.

Limit Pricing

Setting lower prices to deter market entry.

Rent-Seeking

Efforts to maintain or gain monopoly profits.

Antitrust Policies

Government measures to prevent or break monopolies.

Price Discrimination

Charging different prices to different consumers.

Consumer Surplus

Difference between what consumers pay and willingness to pay.

Producer Surplus

Difference between what producers receive and minimum they would accept.

Deadweight Loss

Loss of economic efficiency when equilibrium is not achieved.

Public Ownership

Government-run agency providing goods to protect consumers.

Regulation

Government-imposed price ceilings on monopolists.

Short-run Profit-Maximizing Level

Price maximizing profit before competition enters market.

Elasticity of Demand

Sensitivity of quantity demanded to price changes.

Perfect Price Discrimination

Charging each customer their maximum willingness to pay.

Market Entry

New competitors entering a market to offer similar products.

Economic Profits

Profits exceeding normal returns on investment.

Substitute Products

Alternative goods that consumers can use instead.

Sole Supplier

Only firm providing a specific product in the market.

Graphing Monopoly

Visual representation of monopolist's pricing and output.

Consumer Electronics Pricing

High initial prices for new products in the market.

U.S. Postal Service

Example of a closed monopoly facing competition.

Long-run Equilibrium

Market condition where firms earn zero economic profits.

Profit Maximization Rule

Produce where marginal revenue equals marginal cost.

Advance Purchase Restrictions

Lower prices for early purchases.

Volume Discounts

Lower prices for larger quantity purchases.

Two-Part Tariffs

Flat fee plus per-unit charge for items.

Sales and Outlet Stores

Regular sales and distant outlet locations.

Digital Personalized Pricing

Prices adjusted based on consumer data.

Monopsony

Market with only one buyer.

Opportunity Cost

Cost of next best alternative forgone.

Explicit Costs

Direct monetary outlays for expenses.

Implicit Costs

Non-monetary costs measured by forgone benefits.

Accounting Profit

Revenue minus explicit costs.

Economic Profit

Revenue minus total opportunity costs.

Implicit Cost of Capital

Opportunity cost of using own capital.

Either-Or Decisions

Choosing between two distinct alternatives.

How Much Decisions

Choosing at the margin for resource allocation.

Marginal Analysis

Comparing additional benefits and costs.

Increasing Marginal Cost

Each additional unit costs more to produce.

Constant Marginal Cost

Each additional unit costs the same.

Decreasing Marginal Cost

Each additional unit costs less to produce.

Marginal Benefit

Additional benefit from producing one more unit.

Decreasing Marginal Benefit

Each additional unit yields less benefit.

Optimal Quantity

Quantity generating highest total profit.

Profit-Maximizing Principle

Maximize quantity where marginal benefit equals marginal cost.