Microeconomics: Chapter 8 - Profit Maximization and Competitive Supply in the Long Run

A set of vocabulary flashcards covering producer surplus, long-run competitive equilibrium, economic profit, economic rent, industry supply curves, tax impacts, and supply elasticity based on Chapter 8 of Microeconomics by Pindyck and Rubinfeld.

Producer Surplus (in the Short Run)

The sum over all units produced by a firm of differences between the market price of a good and the marginal cost of production.

Producer Surplus for a Firm (Graphical Measurement)

The area located below the market price and above the marginal cost curve between outputs $0$ and $q^*$, which is alternatively measured by rectangle ABCD representing total revenue minus variable costs.

Producer Surplus for a Market

The total area below the market equilibrium price and above the market supply curve, measured between output $0$ and $Q^*$.

Long-Run Profit Maximization Condition

The decision rule where a competitive firm maximizes long-run profit by producing at the output level where market price equals long-run marginal cost ($P = \text{LMC}$).

Accounting Profit

Total revenues ($R$) minus explicit labor costs ($wL$).

Economic Profit

Total revenues ($R$) minus explicit labor costs ($wL$) minus capital opportunity costs ($rK$).

Zero Economic Profit

The state where a firm earns a normal return on its investment, meaning it is doing as well as it could by investing its capital elsewhere, giving firms no incentive to enter or exit the industry.

Long-Run Competitive Equilibrium

A market condition where all firms maximize profit, every firm earns zero economic profit with no incentive to enter or exit, and the market price equates industry quantity supplied with consumer quantity demanded.

Economic Rent

The amount that firms are willing to pay for an input less the minimum amount necessary to obtain it.

Producer Surplus in the Long Run

The total surplus that a competitive firm earns on its output, consisting of the economic rent it enjoys from all of its scarce inputs.

Constant-Cost Industry

An industry whose long-run supply curve is horizontal because input prices remain unchanged as industry output expands.

Increasing-Cost Industry

An industry whose long-run supply curve is upward sloping because input prices rise as total industry output and demand for inputs increase.

Decreasing-Cost Industry

An industry whose long-run supply curve is downward sloping because cost advantages allow inputs to be acquired more cheaply as production volume expands.

Output Tax (Firm-Level Effect)

A tax that shifts the firm's marginal cost curve upward by the tax amount $t$, causing the firm to reduce output to the point where $\text{MC} + t = P$.

Output Tax (Industry-Level Effect)

A tax placed on all firms in a competitive market that shifts the industry supply curve upward by $t$, raising the market price and lowering total industry output.

Long-Run Elasticity of Supply

The percentage change in industry output ($\Delta Q/Q$) resulting from a percentage change in price ($\Delta P/P$), which is infinitely large in a constant-cost industry and positive but finite in an increasing-cost industry.

Supply Curve for New York Taxicabs

A supply curve that is highly elastic at lower prices but becomes vertical at $13{,}150$ taxicabs because the number of medallions is legally fixed.