Competitive Markets, Costs of Production, and Monopoly

Comprehensive vocabulary flashcards reviewing competitive markets, costs of production, and monopolies based on introductory microeconomics lecture notes and tutorial materials.

Competitive Market

A market with many buyers and many sellers trading identical products so that each buyer and seller is a price taker, and where firms can freely enter or exit the market.

Price Taker

A buyer or seller in a competitive market who has no influence over market price and must accept the price determined by market supply and demand.

Total Revenue ($TR$)

The revenue generated from the sale of output, calculated as market price multiplied by quantity ($TR = P \times Q$).

Average Revenue ($AR$)

Total revenue divided by the quantity of output sold ($AR = \frac{TR}{Q}$), which is always equal to the price ($P$) of the good for all types of firms.

Marginal Revenue ($MR$)

The change in total revenue resulting from selling one additional unit of output ($MR = \frac{\Delta TR}{\Delta Q}$), which equals price ($MR = P$) exclusively for competitive firms.

Profit-Maximization Rule (Competitive Firm)

The operational rule stating that a competitive firm maximizes profit by producing the output quantity at which marginal revenue equals marginal cost ($MR = MC$), meaning price equals marginal cost ($P = MC$).

Competitive Firm Supply Curve

The firm's marginal cost ($MC$) curve, which directly determines the quantity of output the firm is willing to supply at any given market price.

Shutdown

A short-run decision not to produce anything during a specific period due to market conditions; occurs when total revenue is less than variable costs ($TR < VC$) or price is less than average variable cost ($P < AVC$), requiring the firm to still pay fixed costs.

Exit

A long-run decision to permanently leave a market; occurs when total revenue is less than total costs ($TR < TC$) or price is less than average total cost ($P < ATC$), resulting in zero production costs.

Sunk Cost

A cost that has already been committed and cannot be recovered; because it cannot be altered by current or future actions (such as fixed costs in the short run), it is irrelevant to rational decision-making.

Competitive Firm Short-Run Supply Curve

The portion of the competitive firm's marginal cost ($MC$) curve that lies above average variable cost ($AVC$), with zero output produced if market price falls below $AVC$.

Competitive Firm Long-Run Supply Curve

The portion of the competitive firm's marginal cost ($MC$) curve that lies above long-run average total cost ($LRATC$).

Marginal Product ($MP$)

The additional output generated by adding one more unit of an input, such as hiring an additional worker.

Diminishing Marginal Product

The economic property whereby the marginal product of an input progressively declines as the quantity of that input increases, holding other inputs fixed.

Efficient Scale

The level of output that minimizes a firm's average total cost ($ATC$).

Monopoly

A market structure wherein a single firm is the sole seller of a product that has no close substitutes.

Market Power

The ability of an individual firm to influence the market price of the good or service it sells, making the firm a price maker rather than a price taker.

Barriers to Entry

Restrictions that prevent other firms from entering a market—including ownership of a key resource, exclusive government grants (patents or copyrights), or economies of scale—which serve as the fundamental cause of monopolies.

Natural Monopoly

A monopoly that arises when a single firm can supply a good or service to an entire market at a lower cost than two or more firms could, characterized by large fixed costs, small marginal costs, and a continuously downward-sloping average total cost ($ATC$) curve.

Output Effect

The change in total revenue for a monopolist caused by selling more units of output ($Q$), which acts to increase total revenue.

Price Effect

The change in total revenue for a monopolist caused by reducing the price ($P$) on all units sold to sell a greater quantity, which acts to reduce total revenue.

Monopoly Profit Maximization

The process whereby a monopolist chooses the output quantity where marginal revenue equals marginal cost ($MR = MC$) and uses the downward-sloping demand curve to set the price, resulting in $P > MR = MC$.

Price Discrimination

The business practice of selling the same good at different prices to different customers based on their willingness to pay, even though production costs are identical for all buyers.

Willingness to Pay ($WTP$)

The maximum price that a consumer is willing to pay for a unit of a good, used by firms with market power to segment buyers and capture greater profit.