AP Econ - Perfect Competition and Monopoly

Economic Profit

Total Revenue - (Explicit Costs + Implicit Costs), accounting for opportunity costs.

Normal Profit

Occurs when economic profit is zero; firms cover all explicit and implicit costs.

Accounting Profit

Total Revenue - Explicit Costs; typically higher than economic profit.

Marginal Product (MP)

Additional output produced by adding one more unit of a variable input.

Average Product (AP)

Total output divided by the total quantity of a specific input.

Law of Diminishing Marginal Returns

Beyond a certain point, adding more units of a variable input will cause the marginal product to decline.

Fixed Costs (FC)

Costs that do not vary with the level of output.

Variable Costs (VC)

Costs that change with the level of output.

Total Cost (TC)

The sum of fixed and variable costs.

Average Total Cost (ATC)

Total cost divided by the quantity of output; ATC is U-shaped.

Marginal Cost (MC)

Additional cost incurred from producing one more unit of output.

Allocative Efficiency

Occurs when Price (P) equals Marginal Cost (MC).

Productive Efficiency

Occurs when Price (P) equals the minimum Average Total Cost (ATC).

Price Taker

Individual firms in perfect competition must accept the market price.

Long-Run Equilibrium

In perfect competition, firms earn zero economic profit due to free entry and exit.

Monopoly

A market structure with a single seller and no close substitutes.

Natural Monopoly

An industry where one firm can supply the market at a lower average cost than multiple firms due to economies of scale.

Price Discrimination

Charging different prices to different consumers based on their willingness to pay.

Consumer Surplus

The benefit consumers receive from buying a good at a price lower than their maximum willingness to pay.

Producer Surplus

The benefit producers receive from selling a good at a price higher than the minimum they are willing to accept.

Oligopoly

A market structure characterized by a few large firms and high barriers to entry.

Game Theory

A model used to analyze strategic interactions among firms in an oligopoly.

Kinked Demand Curve Model

A model that explains price rigidity in oligopolistic markets, suggesting firms will match price cuts but not increases.