Microeconomics Chap 8-9

Price taker

In a competitive market, firms cannot influence market prices for their goods or input costs, so they don't set prices.

Residual demand curve

The demand curve faced by a firm in a competitive market, derived by subtracting the supply from all other firms from the overall market demand.

Perfect competition

A market structure characterized by many small buyers and sellers, identical products, full information and negligible transaction costs, and free entry and exit.

Economic profit

The profit earned by a business after subtracting both explicit costs (like wages and materials) and opportunity costs (the value of the best alternative use of resources) from revenue.

Output decision

The decision made by a firm to determine the level of output that maximizes profit.

Shutdown decision

The decision made by a firm to choose whether to produce at the profit-maximizing output level or shut down to reduce losses.

Short run

A period in which at least one input is fixed and cannot be changed quickly, leading to limited entry and exit of firms in the market.

Short-run supply curve

The supply curve of a competitive firm in the short run, determined by its marginal cost curve above its minimum average variable cost.

Long run

A period in which all inputs, including capital and production scale, can be adjusted by firms.

Long-run supply curve

A curve that shows the quantity a firm will supply at different prices in the long run, considering its costs and profit goals.

represented by its long-run marginal cost curve above the point where the market price exceeds the minimum of its long-run average cost curve.

Competitive firm

A firm that operates in a market with many other firms producing similar goods or services.

Long-run average cost

The average cost per unit of output when all inputs are variable in the long run.

Shut down

The decision of a firm to cease operations temporarily or permanently due to incurring losses.

Entry and Exit in the Long Run

The decision of firms to enter a market if they can make long-term profit and exit if they face long-term losses.

Long-run market supply curve

The curve that represents the supply of a good or service in a market with free entry and exit of firms, where firms earn zero long-run economic profit.

Limited entry

The situation where the government restricts market entry, resulting in a sloping long-run market supply curve.

Effect of Input Prices on Market Supply

The relationship between input prices and the long-run supply curve, where an increase in input prices leads to an upward-sloping supply curve.

Residual supply curve

The quantity of a good or service that the market supplies that is not consumed by other demanders at any given price.

Long-run competitive equilibrium

The point where the long-run market supply and demand curves intersect, resulting in zero economic profit for firms.

Welfare economics

The study of the impact of changes on various groups' well-being in society.

Consumer surplus

The difference between what a consumer is willing to pay for a good and what they actually pay.

Producer surplus

The difference between the amount a producer receives from selling a good and the minimum amount necessary for them to be willing to produce the good.

Marginal willingness to pay

The maximum amount a consumer is willing to spend for an extra unit of a good.

Market consumer surplus

The total consumer surplus for all consumers in a market, measured as the area under the market demand curve above the market price.

Effect of a Price Change on Consumer Surplus

The impact of a price change on consumer surplus, where an increase in price reduces consumer surplus and a decrease in price increases consumer surplus.

Producer welfare

The measure of the benefit a producer receives from participating in the market, represented by producer surplus.

Measuring Producer Surplus Using a Supply Curve

The calculation of producer surplus by measuring the area above the supply curve and below the market price up to the quantity produced.

Fixed cost

The cost that does not vary with the level of output produced by a firm.

Gain to trade

The additional benefit or surplus that results from engaging in a trade transaction.

Producer Surplus

The difference between the price at which producers are willing to sell a product and the price they actually receive.

Fixed Costs

Costs that do not change with changes in production or sales, such as rent for a factory.

Consumer Surplus

The benefit consumers receive because they are paying less for a product than the maximum price they are willing to pay.

Equilibrium

The point at which the forces of supply and demand determine the most efficient allocation of resources, maximizing consumer and producer surplus.

Deadweight Loss

The net reduction in welfare from a loss of surplus by one group that is not offset by a gain to another group from an action that alters a market equilibrium.

Deadweight loss refers to the loss of economic efficiency that occurs when the allocation of goods or resources in a market is not at the most efficient level, usually caused by market inefficiencies such as taxes, price controls, monopolies, or externalities.

Competitive Equilibrium

The point at which supply and demand are in balance, resulting in the most efficient allocation of resources.

Entry Barrier

A restriction or cost that makes it difficult for new firms to enter a market.

Exit Restriction

Laws or regulations that delay how quickly firms can go out of business.

Wedge

A gap between the price and marginal cost caused by government policies such as sales taxes or price controls.

Sales Tax

A tax imposed on the sale of goods or services, resulting in a higher price for consumers and a lower price received by producers.

Welfare Effects

The impact on overall welfare, including changes in consumer surplus, producer surplus, and tax revenue.