Week 7 key definitions Flashcards
Differentiated product
A product produced by a single firm that has some unique characteristics compared to similar products of other firms
Economies of scale
These occur when doubling all of the inputs to a production process more than doubles the output. The shape of a firm’s long-run average cost curve depends both on returns to scale in production and the effect of scale on the prices it pays for its inputs.
Willingness to pay
An indicator of how much a person values a good, measured by the maximum amount he or she would pay to acquire a unit of the good.
Demand curve
The curve that gives the quantity consumers will buy at each possible price.
Price-setting curve
The curve that gives the real wage paid when firms choose their profit-maximizing price.
Consumer surplus
The consumer’s willingness to pay for a good minus the price at which the consumer bought the good, summed across all units sold.
Producer surplus
The price at which a firm sells a good minus the minimum price at which it would have been willing to sell the good, summed across all units sold.
Deadweight loss
A loss of total surplus relative to a Pareto-efficient allocation.
Market failure
When markets allocate resources in a Pareto-inefficient way.
Price elasticity of deamnd
The percentage change in demand that would occur in response to a 1% increase in price. We express this as a positive number. Demand is elastic if this is greater than 1, and inelastic if less than 1.
Profit margin
The difference between the price and the marginal cost.
