OA - Economic Decision Making by Firms and Consumers Flashcards
(31 cards)
Term
Definition
Short-run production constraint
In the short run, a firm cannot adjust fixed inputs like buildings or machinery, only variable inputs like labor.
Example: In the short run, a firm cannot adjust fixed inputs like buildings or machinery, only variable inputs like labor.
Price discrimination
Selling the same good at different prices to different customers, increasing total surplus.
Example: Selling the same good at different prices to different customers, increasing total surplus.
Monopolistic competition vs. Oligopoly
Monopolistic competition has many small sellers with free entry, while oligopolies have few sellers, each influencing others.
Example: Monopolistic competition has many small sellers with free entry, while oligopolies have few sellers, each influencing others.
Explicit vs. Implicit Costs
Explicit costs require direct payment (like wages), while implicit costs do not (like opportunity costs).
Example: Explicit costs require direct payment (like wages), while implicit costs do not (like opportunity costs).
Economies of Scale
Long-run average total cost falls as output increases due to factors like specialization.
Example: Long-run average total cost falls as output increases due to factors like specialization.
Perfect Competition
Firms sell identical products, have no pricing power, and can freely enter/exit the market.
Example: Firms sell identical products, have no pricing power, and can freely enter/exit the market.
Total Revenue
Calculated as Price × Quantity.
Example: Calculated as Price × Quantity.
Profit Maximization
Occurs where Marginal Revenue = Marginal Cost.
Example: Occurs where Marginal Revenue = Marginal Cost.
Consumer Choice Theory
Explains how consumers maximize utility given budget constraints, forming demand curves.
Example: Explains how consumers maximize utility given budget constraints, forming demand curves.
Indifference Curves
Graphical representations of combinations of goods between which a consumer is indifferent.
Example: Graphical representations of combinations of goods between which a consumer is indifferent.
Market Power in Monopoly
Monopolists face downward-sloping demand, meaning MR < Price, enabling profit maximization at restricted output.
Example: Monopolists face downward-sloping demand, meaning MR < Price, enabling profit maximization at restricted output.
Deadweight Loss of Monopoly
Monopolies produce less than the socially optimal output, causing a loss of total surplus.
Example: Monopolies produce less than the socially optimal output, causing a loss of total surplus.
Free Entry
Most likely in industries like dairy farming, where entry barriers are low.
Example: Most likely in industries like dairy farming, where entry barriers are low.
Average Revenue vs. Marginal Revenue
For competitive firms, AR = Price = MR. For monopolists, MR < Price due to price effects on revenue.
Example: For competitive firms, AR = Price = MR.
Competitive Firm Pricing
Cannot influence price—sells at market price. Raising price = losing all customers.
Example: Cannot influence price—sells at market price.
Accounting vs. Economic Profit
Accounting profit doesn’t subtract implicit costs; economic profit does. Thus, economic profit < accounting profit.
Example: Accounting profit doesn’t subtract implicit costs; economic profit does.
Oligopoly Traits
Few sellers, interdependence between firms, actions of one impact all. Prices may exceed marginal costs.
Example: Few sellers, interdependence between firms, actions of one impact all.
Game Theory in Oligopoly
Firms may not cooperate even when it’s in their best interest—self-interest leads to worse joint outcomes.
Example: Firms may not cooperate even when it’s in their best interest—self-interest leads to worse joint outcomes.
Prisoners’ Dilemma
Each party acts in self-interest, leading both to worse outcomes than if they had cooperated.
Example: Each party acts in self-interest, leading both to worse outcomes than if they had cooperated.
Monopolistic Competition Long Run
Firms earn zero economic profit due to free entry—profit disappears over time.
Example: Firms earn zero economic profit due to free entry—profit disappears over time.
Antitrust Laws
Promote competition by preventing mergers and anti-competitive practices that harm consumer welfare.
Example: Promote competition by preventing mergers and anti-competitive practices that harm consumer welfare.
Marginal Cost and Average Total Cost
MC = ATC at the minimum point of the ATC curve.
Example: MC = ATC at the minimum point of the ATC curve.
Demand Curve Slope in Monopoly
Downward sloping → to sell more, must lower price, reducing MR below price.
Example: Downward sloping → to sell more, must lower price, reducing MR below price.
