Sellers and Incentives - Vocabulary Flashcards

Vocabulary flashcards covering key concepts from Sellers and Incentives: Perfect competition, the seller’s problem, costs, revenues, profits, supply decisions, and related concepts.

Perfect competition

A market structure with many buyers and sellers, identical goods, free entry and exit; no single agent can influence the market price.

The Seller’s Problem

Three tasks the seller faces: how to produce the product, what it costs, and how much to sell for to maximize profit, making decisions at the margin.

Production function

The relationship between inputs used and the maximum output that can be produced.

Short run

A period in which at least one input is fixed; some costs cannot be changed.

Long run

A period in which all inputs are variable; firms can adjust all factors of production.

Variable cost (VC)

Costs that change as the level of output changes.

Fixed cost (FC)

Costs that do not change with the level of output in the short run (overhead).

Total cost (TC)

The sum of variable costs and fixed costs (TC = VC + FC).

Average Total Cost (ATC)

Total cost per unit of output (ATC = TC / Q).

Average Variable Cost (AVC)

Variable cost per unit of output (AVC = VC / Q).

Average Fixed Cost (AFC)

Fixed cost per unit of output (AFC = FC / Q).

Marginal Cost (MC)

The change in total cost from producing one more unit of output.

Marginal Product (MP)

The change in total output when one additional unit of input is used.

Marginal Revenue (MR)

The change in total revenue from selling one more unit of output.

Total Revenue (TR)

Price times quantity sold (TR = P × Q).

Profit (economic vs accounting)

Economic profit = TR − total costs (including explicit and implicit costs); accounting profit = TR − explicit costs.

Economic profit

Profit that includes opportunity costs; can be zero or negative if implicit costs are not covered.

Accounting profit

Profit calculated using explicit costs only.

MR = MC rule

Profit is maximized where marginal revenue equals marginal cost; in perfect competition MR = P.

Shutdown decision

In the short run, shut down if price < AVC; continue if price ≥ AVC; not the same as exiting in the long run.

Free entry and exit

No barriers preventing firms from entering or leaving the market.

Long-run competitive equilibrium

With free entry/exit, firms earn zero economic profit; long-run supply is often horizontal.

Elasticity of supply

Responsiveness of quantity supplied to price; es = (%ΔQs)/(%ΔP).

Elasticity types (supply)

Elastic (es > 1), Inelastic (es < 1), Unit elastic (es = 1).

Economies of scale

ATC falls as output increases due to factors like specialization and efficiencies.

Constant returns to scale

ATC remains unchanged as output increases.

Diseconomies of scale

ATC rises as output increases due to inefficiencies at larger scales.

Sunk costs

Fixed costs that cannot be recovered; they should not affect current/future production decisions.

Price-taking behavior

In a perfectly competitive market, firms cannot influence price; they take the market price as given.

Short-run supply curve (MC above AVC)

In the short run, a firm’s supply is the portion of its MC curve above the AVC curve.

Producer surplus

The area below the market price and above the marginal cost curve; the difference between what producers are willing to accept and what they actually receive.

Law of diminishing returns

As more units of a variable input are added to a fixed input, marginal product eventually declines.