Microeconomics: Costs of Production and Market Structures

Comprehensive vocabulary flashcards covering short-run and long-run production costs, perfectly competitive firms, monopolies, price discrimination, oligopolies, and monopolistic competition.

Price Taker

A firm in a perfectly competitive market that cannot influence the market price because each seller supplies only a small fraction of the total market output, meaning that raising its price would cause it to lose all customers.

Profit Maximization Rule

The operational principle stating that any firm maximizes total profit or minimizes total loss by producing at the output level where marginal revenue equals marginal cost ($MR = MC$).

Shut-Down Rule

The short-run decision rule specifying that a firm should shut down and produce zero output if the market price drops below the minimum average variable cost ($P < \text{minimum AVC}$).

Sunk Cost

A past cost that cannot be recovered; in the short run, a firm's fixed cost is considered sunk because it remains identical whether the firm operates or completely shuts down.

Allocative Efficiency

An economic state achieved when price equals marginal cost ($P = MC$), ensuring that the price paid by society for the last unit produced equals the marginal cost of producing it.

Productive Efficiency

An economic state achieved when a firm produces output at the lowest possible per-unit cost, which occurs in the long run where price equals the minimum average total cost ($P = \text{minimum ATC}$).

Total Cost Curves

Cost diagrams displaying fixed cost as a flat horizontal line, total variable cost starting at the origin and increasing with output, and total cost beginning at the fixed cost intercept and tracking above total variable cost.

Average Fixed Cost (AFC)

The fixed cost per unit of output, visually measured as the vertical spread between the average total cost ($ATC$) curve and the average variable cost ($AVC$) curve at any given output level.

Marginal Revenue ($MR$)

The additional income generated from selling one extra unit of output, defined mathematically as the slope of the total revenue curve ($\frac{\Delta TR}{\Delta Q}$).

Monopoly Demand and Marginal Revenue Relationship

The structural relationship where price equals average revenue and exceeds marginal revenue ($P = AR > MR$), because a nondiscriminating monopolist must lower the price on all units sold to sell one more unit.

Elastic Portion of Demand

The segment of the downward-sloping demand curve where marginal revenue is positive ($MR > 0$) and total revenue increases as price falls; this is the only portion on which a profit-maximizing monopolist will produce.

Inelastic Portion of Demand

The segment of the demand curve where marginal revenue is negative ($MR < 0$), causing total revenue to decrease when the firm lowers its price to expand output.

Deadweight Loss in Monopoly

The loss in total economic surplus caused by monopoly output restrictions; its true cost is estimated to be higher than conventional measures because monopolists spend additional resources to secure and maintain monopoly status.

Perfect Price Discrimination

A pricing practice where a seller charges each buyer their maximum willingness to pay, resulting in demand equaling marginal revenue ($D = MR$), zero consumer surplus, and all surplus converted into economic profit.

Product Proliferation

A strategic barrier to entry used by existing oligopolies whereby established firms introduce multiple product varieties to crowd out prospective new entrants from the market.

Constant Cost Industry

An industry where firm entry and exit do not influence input costs, leading to a perfectly elastic, horizontal long-run industry supply curve that returns the market price to its original level following a demand shift.

Increasing Cost Industry

An industry in which industry expansion and firm entry bid up input prices, shifting the individual firms' cost curves ($ATC$ and $MC$) upward and resulting in an upward-sloping long-run industry supply curve.

Monopolistic Competition

A market structure characterized by many firms selling differentiated products with low barriers to entry and exit, facing downward-sloping demand curves, and earning zero economic profit (normal profit) in the long run.

Long-Run Industry Supply Curve

The curve depicting the relationship between price and output supplied across an entire industry after all existing firms have fully adjusted and all economic profits or losses have induced entry or exit.

Patent

A government-granted legal protection that stimulates investment by providing firms and inventors the incentive to incur significant up-front costs to research and develop new products.

Shut-Down Point in Perfect Competition

The output and price level where marginal cost intersects the minimum point of the average variable cost curve ($MC = \text{AVC}$).