MODULE 4

economic cost, or opportunity cost

economic cost, or opportunity cost

The measure of the _, of any resource used to produce a good is the value or worth the resource would have in its best alternative use.

explicit costs

implicit costs

1.     A firm’s _ are the monetary payments (or cash expenditures) it makes to those who supply labor services, materials, fuel, transportation services, and the like. Such money payments are for the use of resources owned by others.

 

2.       A firm’s _ are the opportunity costs of using its self-owned, self-employed resources. To the firm, implicit costs are the money payments that self-employed resources could have earned in their best alternative use.

production function

A _ is an equation that expresses the relationship between the amount of output that can be produced given the quantities of productive factors (e.g., labor and capital) used in the production, assuming that the most efficient available methods of production are used

producer

The _ (a company or firm) is responsible for creating the production function (output) and is subject to various cost measures and the results of diminishing returns

economic profit

An _ is not a cost because it is a return in excess of the normal profit that is required to retain the entrepreneur in this particular line of production

free entry and exit

all firms produce an identical product

many producers and consumer

characteristics of perfectly competitive market

the firm would cut back its output level because it is making a loss on the production of the marginal unit. This adjustment process continues until MR equals MC, which will ensure that profit is maximized.

the marginal unit adds less to total cost that it does to total revenue. Thus, it makes sense to produce this unit. The excess of marginal revenue over marginal cost adds to profit and so the firm should increase its production as long as marginal revenue exceeds marginal cost. Figure 2 illustrates the different equilibrium positions in the short run.

If MR < MC, _ 

If MR > MC, _

1. Free Entry and Exit: Firms can enter or leave the market without obstacles.2

2. Identical Products: No brand differentiation; competition is based on price.

3. Many Producers and Consumers: No single participant can influence the market.

4. Perfect Knowledge: Consumers and producers have full information.

1. Exclusive Control of a Factor of Production: Control over key inputs.

2. Economies of Scale: Lower costs at higher output levels.

3. Government-Created Monopoly: Patents, copyrights, and exclusive franchises.

1. Large Number of Firms: No firm dominates the market.

2. Product Differentiation: Each firm’s product is slightly different.

3. Freedom of Entry and Exit: No barriers to competition.

4. Non-Price Competition: Emphasis on product differences, advertising, and service.

• Few large sellers, producing either homogeneous or differentiated products.

• Recognized interdependence among firms.

CHARACTERISTICS OF

PURE COMPETITION

PURE MONOPOLY

MONOPOLISTIC COMPETITION

OLIGOPOLY