Microeconomics for Managers: Firms in Output Markets

Comprehensive vocabulary flashcards covering microeconomic principles of firm behavior, cost structures, profit maximization, and market competition based on Chapter 8 of the lecture notes.

Accounting profit

The difference between total revenue and total costs, where costs refer to expenditures on factors of production like labour, capital, and raw materials.

Economic profit

Total revenue minus economic costs, which include both explicit and implicit costs.

Explicit costs

Costs that lead to a monetary expense, such as paying a supplier or rent, also known as accounting costs.

Implicit costs

Costs that do not lead to a monetary expense but are considered lost income from the best alternative choice, such as the wage a self-employed person could earn elsewhere.

Economic cost (Opportunity cost)

The value of an input in its best alternative use, calculated as the sum of explicit and implicit costs: $\text{Economic cost} = \text{explicit cost} + \text{implicit cost}$.

The short run

The period of time in which some factors of production cannot be changed and a producer is bound by ongoing commitments.

The long run

The period of time in which all factors of production, input prices, and production capacity can be adjusted.

Fixed costs ($FC$)

Costs that do not vary with production volume, such as the periodic rental of buildings and machines.

Variable costs ($VC$)

Costs that change with production volume, such as the cost of raw materials.

Sunk costs

Costs that have already been incurred and cannot be recovered or avoided; in the short run, fixed costs are considered sunk costs.

Total revenue ($TR$)

The total amount of money a company receives from selling its output, calculated as $TR = p(q) \times q$.

Average revenue ($AR$)

Total revenue divided by the amount of output, which is equal to the price ($p$).

Marginal revenue ($MR$)

The change in total revenue due to a very small change in the amount of output, calculated as the derivative of the total revenue function with respect to $q$.

Average costs ($AC$)

The total cost divided by the amount of output, representing the cost per unit of production ($AC = \frac{TC}{q}$).

Marginal cost ($MC$)

The change in total costs due to a change in the amount of output, represented by the slope of the tangent to the total cost curve.

Efficient scale point

The production level where average cost ($AC$) is at its minimum and equals the marginal cost ($MC$).

Output Rule

A profit-maximizing firm chooses a level of output where its marginal revenues equal its marginal costs: $MR = MC$.

Shutdown rule (Long term)

A firm will shut down if its economic profit is negative, which occurs if the market price is lower than the average cost ($p < AC$).

Shutdown rule (Short term)

A firm will shut down if the total revenue is less than variable costs ($TR < VC$) or if the market price is lower than the average variable cost ($p < AVC$).

Price taker

A supplier in a perfectly competitive market who is small compared to the market and must accept the market price as given, meaning $AR = MR = p$.

Perfect competition

A market type characterized by many buyers and sellers, homogeneous products, market transparency (symmetric information), and no entry or exit barriers.

Economic rent

The profit enjoyed by inframarginal firms (more efficient firms) that have access to a scarce or superior technology in a market with heterogeneous firms.

Transaction costs

All costs incurred on top of the price of what is traded, such as search costs to find a trading partner or costs to check their reliability.

Principal-agent problem

A situation in large firms where the objectives of the shareholders (principals) conflict with the objectives of the management (agents).