Microeconomics: Costs, Production, and Market Structures

Comprehensive vocabulary flashcards covering cost concepts, production theory, firm behavior, efficiency, perfect competition, monopoly, monopolistic competition, and oligopolies.

Rational Self-Interest

The assumption that people weigh costs and rewards to maximize their personal utility.

Economic Costs

Costs that weigh the cost of everything, including the highest value opportunity foregone and all valuable inputs used in production.

Total Costs

The explicit payments made to the factors of production plus the opportunity costs of factors provided by the owner of the firm.

Explicit Costs

Contractual or direct monetary payments made for inputs.

Implicit Costs

Costs where no actual money is exchanged, but economic resources are still being used.

Marginal Cost

The additional cost incurred from producing $1$ incremental unit of output.

Relevant Cost

The additional cost incurred by adding units of production.

Law of Diminishing Marginal Productivity

The principle that as more of a variable input is added to a fixed input, the additional output produced by each extra unit will eventually start to decrease.

Marginal Product

The additional output forthcoming from adding an additional worker, holding other inputs constant.

Average Product

The total output produced per worker.

Depreciation

A measure of the decrease in the value of an asset that occurs over time.

Switching Costs

The costs that consumers face when changing from one product to another.

Economic Profit

Total revenue minus the sum of explicit costs and implicit costs: $\text{Economic profit} = TR - (\text{explicit costs} + \text{implicit costs})$.

Residual Income Claimant

The owners or entrepreneurs who claim the remaining revenue (profit) after all bills and expenses have been paid.

Principal-Agent Problem

A conflict that occurs when an employee acts in their own self-interest, which may run contrary to the interests of the employer.

Shirking

An action occurring when an employee does not put forth as much effort as the employer expects or desires.

Separation of Ownership and Control

A condition in public companies where the shareholders who own the business are distinct from the managers who run it.

Horizontal Scope

The determination of what sort of businesses or product lines a company chooses to operate in.

Entrepreneurial Ability

An input of production that organizes the other inputs, introduces innovations, and assumes business risks.

Technical Efficiency

A condition achieved when a production process uses as few inputs as possible to produce a given level of output.

Economic Efficiency

The method of production that produces a given level of output at the lowest possible cost.

Economies of Scale

A situation where long-run average cost ($LRAC$) decreases as total output increases.

Diseconomies of Scale

A situation where long-run average cost ($LRAC$) increases as output increases, often caused by rising monitoring costs and reduced team spirit.

Constant Returns to Scale

A condition in which long-run average cost ($LRAC$) does not change as output expands.

Indivisible Setup Cost

The cost of an individual input that cannot be partitioned, requiring a minimum amount of production before it becomes economically feasible to use.

Economies of Scope

A production characteristic where costs are interdependent, making it less costly for a firm to produce one good when it simultaneously produces another.

Price Taker

A firm or individual that takes the market-determined equilibrium price as given because it cannot influence the market price.

Sunk Cost

A cost that has already been incurred and cannot be recovered.

Sunk Cost Fallacy

The error of allowing previously incurred unrecoverable costs to influence current cost-benefit decisions.

Marginal Revenue

The change in total revenue resulting from an incremental change in the quantity sold.

Shutdown Point

The operational point where price equals average variable cost ($P = AVC$); below this point, a firm is better off producing zero units to avoid variable costs.

Normal Profit

A situation where economic profit equals zero in the long run.

Monopoly

A market structure in which a single firm accounts for the entire market due to barriers to entry.

Patent

A legal protection granted for a technical innovation that gives the holder the exclusive right to use it.

Welfare Loss

The benefit lost to society when output is restricted below the competitive level.

Price Discrimination

The business practice of charging different prices to different individuals or groups of consumers.

Reservation Value

The maximum price an individual consumer is willing to pay for a good, also referred to as the choke price.

Perfect Price Discrimination

A pricing strategy where a seller charges every single customer their exact individual reservation value.

Natural Monopoly

An industry in which a single firm can supply the entire market at a lower average cost than two or more firms could.

Platform Businesses

Firms that provide an infrastructure or platform that facilitates direct interaction among different groups of people.

First Mover Advantage

The benefits and competitive edge gained by a company from being the first to capture a significant market share.

Network Externality

An effect whereby greater usage of a product increases the value and benefit of that product to all other users without additional payment.

Monopolistic Competition

A market structure characterized by many firms selling differentiated products with few barriers to entry in the long run.

Cross Price Elasticity of Demand

A metric measuring how the quantity demanded of one good responds to a percentage change in the price of another good.

Oligopoly

A market structure where a few interdependent firms sell similar or identical products.

Cartel

A group of independent agents or firms that coordinate actions to act as a quasi-monopoly.

Collusion

An arrangement where firms actively cooperate rather than compete in order to maximize industry profits.

Production Quota

The maximum output limit assigned to an individual firm by a cartel agreement.

Implicit Collusion

A situation where multiple firms make identical pricing decisions without directly or explicitly consulting one another.

Creative Monopoly

A firm that produces a unique innovation for which competing firms cannot create a close substitute.

Fringe Firms

Non-dominant firms in an industry that follow the price and output decisions established by the market leader.

Prisoner's Dilemma

The mathematical framework illustrating how individual greed and lack of trust compel rational agents to achieve a suboptimal outcome rather than joint profit maximization.

Economic Moat

A metaphor for a barrier to entry that shields a company and prevents rivals from easily entering the market.

Deadhand

The condition of having a weakened incentive to innovate and decrease costs over time.

Contestable Market Model

An oligopoly model postulating that pricing and output choices are dictated by barriers to entry and barriers to exit rather than industry structure alone.

Concentration Ratio

The proportion of total industry sales generated by the top firms in a market, expressed as a percentage.

Herfindahl Index

An index measuring market concentration calculated by summing the squared values of the individual market shares of all firms in the industry.