Microeconomics: Production, Costs, and Market Equilibria

Comprehensive vocabulary flashcards covering production theory, cost concepts, partial equilibrium under perfect competition, and general equilibrium exchange theory.

Production Function

A mathematical or conceptual relation that shows how inputs are transformed into output.

Primary Production Inputs

The two primary resources used in production: Labor ($L$) and Capital ($K$).

Average Product of Labor ($AP_L$)

The total output produced divided by the total labor employed (output per worker).

Marginal Product of Labor ($MP_L$)

The additional output generated by employing one additional unit of labor.

Marginal Product of Capital ($MP_K$)

The additional output generated by employing one additional unit of capital.

Relationship Between $MP_L$ and Rising $AP_L$

$MP_L$ lies above $AP_L$ whenever $AP_L$ is increasing.

Relationship Between $MP_L$ and Falling $AP_L$

$MP_L$ lies below $AP_L$ whenever $AP_L$ is decreasing.

Intersection of $MP_L$ and $AP_L$

The point where $MP_L$ crosses $AP_L$, which occurs precisely at $AP_L$'s maximum point.

Isoquant

A curve displaying all possible combinations of labor and capital that produce the same level of output.

Marginal Rate of Technical Substitution ($MRTS$)

The amount by which capital can be reduced when labor increases by one unit while keeping output constant.

Linear Production Function

A production function where inputs are easily substituted for one another.

Linear Isoquant

An isoquant characterized by a straight line, representing perfect substitutability between inputs.

$MRTS$ of a Linear Production Function

The marginal rate of technical substitution that remains constant along the entire isoquant.

Fixed Proportions Production Function

A production function where inputs must be utilized in a strictly defined, fixed proportion.

Fixed Proportions Isoquant

An L-shaped isoquant corresponding to a fixed proportions production technology.

Input Substitutability in Fixed Proportions

Inputs cannot be substituted for one another while maintaining the same level of output.

Returns to Scale

A measure of how output responds when all production inputs are increased together by the same proportion.

Increasing Returns to Scale

A situation where output increases by a greater proportion than the increase in inputs.

Constant Returns to Scale

A situation where output increases in direct proportion to the increase in inputs.

Decreasing Returns to Scale

A situation where output increases by a smaller proportion than the increase in inputs.

Labor-Enhancing Technological Progress

Technological progress in which the resulting increase in $MP_L$ exceeds the increase in $MP_K$.

Isocost Line

A line depicting all input combinations that incur the same total cost.

Cost Minimization

The objective of producing a required level of output at the lowest possible total expenditure.

Cost-Minimization Condition

The optimality condition where the $MRTS$ equals the ratio of input prices.

Input Demand Function

A function giving the optimal quantity of a specific production input demanded by a firm.

Fixed Cost

A production cost that does not change as output expands.

Variable Cost

A production cost that rises as the quantity of output produced increases.

Sunk Cost

A cost that a firm cannot recover even after shutting down its operations.

Nonsunk Cost

A cost that a firm is able to recover if it decides to shut down.

Average Cost ($AC$)

The total cost of production divided by the total units of output produced (total cost per unit).

Marginal Cost ($MC$)

The additional cost incurred from producing one additional unit of output.

Economies of Scale

A property where average cost decreases as the level of output increases.

Diseconomies of Scale

A property where average cost increases as the level of output increases.

Economies of Experience

A phenomenon where average variable cost declines over time as cumulative past production increases.

Partial Equilibrium

The economic analysis of one isolated market at a time, holding other markets fixed.

Perfectly Competitive Market

A market structure characterized by many small firms selling identical products.

Fragmented Market

A market environment consisting of many small firms, each holding a negligible market share.

Undifferentiated Products

Goods or services that consumers perceive as completely identical across suppliers.

Perfect Pricing Information

A condition in which buyers can observe and compare all sellers' prices without incurring any cost.

Free Entry and Exit

A market characteristic where firms can enter or exit the industry without facing barriers.

Price Taker

A firm that must accept the prevailing market price because it cannot influence it.

Production Adjustment when $P > MC$

The profit-maximizing rule directing the firm to expand production when market price exceeds marginal cost.

Production Adjustment when $P < MC$

The profit-maximizing rule directing the firm to reduce production when market price is less than marginal cost.

Second-Order Condition for Profit Maximization

The requirement that the marginal cost curve must be upward-sloping at the profit-maximizing output level.

Long-Run Individual Firm Supply

The portion of the firm's marginal cost ($MC$) curve that lies above its average cost ($AC$) curve.

Short-Run Individual Firm Supply

The firm supplies positive output when price exceeds its average nonsunk cost ($ANSC$).

Operating with Losses in the Short Run

Continuing production when operating revenue exceeds nonsunk costs, which yields smaller losses than shutting down and bearing unrecoverable sunk costs.

Market Supply Aggregation

The summation of the quantities supplied by all individual firms horizontally across each price level.

Short-Run Market Equilibrium

The condition where market demand equals market supply given a fixed number of participating firms.

Long-Run Competitive Equilibrium Conditions

Market equilibrium where firms earn zero economic profit and market demand equals total industry supply.

General Equilibrium

The analysis of how multiple interdependent markets interact and determine prices simultaneously.

Endowment

The bundle of physical goods or resources initially owned by a consumer before trade occurs.

Allocation

A specification of the quantities of each good consumed by every individual in an economy.

Feasible Allocation

An allocation of consumption goods that does not exceed the total available resources in the economy.

Edgeworth Box

A graphical diagram representing the feasible allocations and preferences of a two-good, two-consumer economy.

Equilibrium Price Vector

A set of relative prices that causes all markets in the economy to clear simultaneously.

Market Clearing

The state in which aggregate demand across all agents equals total aggregate supply in every market.

Consumer Income in Pure Exchange

The total budget of an agent determined by the market value of their initial endowment.

Pareto Efficiency

An economic state where no individual can be made better off without making at least one other individual worse off.

Pareto Optimality

An alternative name for Pareto efficiency.

First Fundamental Theorem of Welfare Economics

The proposition that every competitive equilibrium allocation is Pareto efficient under its underlying assumptions.

Assumptions of the First Welfare Theorem

The necessary conditions requiring the absence of externalities and the presence of complete markets.

Externalities

Direct effects of an agent's actions on another's well-being that are not reflected in prices or market transactions.

Complete Markets

A market setting where markets exist for every good and all consumers act as price takers.

Attainability of Efficient Allocations via Trade

The principle that not every Pareto efficient allocation arises automatically; initial endowments may require redistribution.