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Chapter 101. Command System- A method of allocating resources by the order (command) of someone in authority.a. Example : If you have a job, most likely someone tells you what to do. Your labor is allocated to specific tasks by a command.2. Economic Efficiency- A situation that occurs when the firm produces a givenoutput at the least cost.a. Example : When my bakery produces 50 cakes a day using 2 ovens and 3 workers, total cost is $350. When my bakery produces 50 cakesa day using 3 ovens and 2 workers, total cost is $400. Economic efficiency occurs when my bakery produces 50 cakes a day using 2 ovens and 3 workers.3. Economies Of Scale- Features of a firm’s technology that make average total cost fall as output increases—the LRAC curve slopes downward.a. Example : If GM produces 100 cars a week, each worker must perform many different tasks and the capital must be general-purposemachines and tools. But if GM produces 10,000 cars a week, each worker specializes in a small number of tasks, uses task-specific tools, and becomes highly proficient.4. Economies Of Scope- Decrease in average total cost that occur when a firm uses specialized resources to produce a range of goods and services.a. Example : Toshiba uses its designers and specialized equipment to make the hard drive for an iPod. But it makes many different types of hard drives and other related products. As a result, Toshiba produces the iPod hard drive at a lower cost than a firm making only the iPod hard drive could achieve.5. Four-Firm Concentration Ratio- A measure of market power that is calculated as the % of the value of sales accounted for by the 4 largest firms in an industry.a. Example : 14 firms produce tires. The largest 4 have 80% of the sales, so the four-firm concentration ratio is 80%. 6. Herfindahl-Hirschman Index- A measure of market power that is calculated as the square of the market share of each firm (as a %), summed over the largest 50 firms (or over all firms if there are less than 50 firms) in a market.a. Example : If there are 4 firms in a market and the market shares of thefirms are 50%, 25%, 15%, and 10%, the Herfindahl-Hirschman Index is 50^2 + 25^2 + 15^2 + 10^2 = 3,450.7. Principal-Agent Problem- The problem of devising compensation rules thatinduce an agent to act in the best interest of a principal.a. Example : Steve Jobs (a principal) must induce the designers who are working on the next generation iPhone (agents) to work efficiently.8. Technological Efficiency- A situation that occurs when the firm produces a given output by using the least amount of inputs.a. Example : My bakery can produce 50 cakes a days using 2 ovens and 3workers. It can also produce 50 cakes a day using 3 ovens and 3 workers. Using 2 ovens and 3 workers is technologically efficient.Chapter 111. Average Fixed Cost- Total fixed cost per unit of output.a. Example : if the total fixed cost of producing 10 pizzas is $50 a day, then the average fixed cost is $5 a pizza.2. Minimum Efficient Scale- The smallest quantity of output at which the long-run average cost curve reaches its lowest level.a. Example : When Tony’s pizza produces 19 pizzas in an hour, the average cost of each pizza is $6. And when Tony’s pizza produces 20 pizza in an hour, the average cost of each pizza is $5.50. But when Tony’s produces the 21st pizza in an hour, the average cost of each pizza rises to $5.75. When Tony’s produces 20 pizzas in an hour, it is producing at its minimum efficient scale.3. Sunk Cost – The past expenditure on a plant that has no resale value. a. Example : A year ago, I paid $1,700 for car repairs. Now my car needsmore repairs. I can spend $1,200 for the repairs or but a new car. The$1,700 that I paid for repairs a year ago is a sunk cost and is irrelevantto my current decision.4. Marginal Product- The increase in total product that results from a one-unitincrease in the variable input, with all other inputs remaining the same. It is calculated as (the increase in total product) divided by (the increase in the variable input employed), when the quantities of all other inputs remain the same.a. Example : I own a computer and can complete 2 assignments in 1 week and 3 assignments in 2 weeks. My marginal product is the increase in the number of assignments I can complete as a result of increasing my variable input – the time spent. My marginal product is1 assignment.5. Marginal Cost – The opportunity cost of producing one more unit of a good or service. Best alternative foregone. Calculated as (the increase in total cost) divided by (the increase in output).a. Example : When I produce my 3rd table in a week I give up producing 2 bookshelves. The marginal cost of 3rd table is 2 bookshelves.Chapter 121. External Diseconomies- Factors outside the control of a firm that raise the firm’s costs as the market output increase.a. Example : With bigger airline industry output, there is greater congestion of both airports and airspace, which results in longer delays and extra waiting time for passengers and airplanes.2. External Economies- Factors beyond the control of a firm that lower the firm’s costs as the market output increase.a. Example : As farm output increased in the 19th and early 20th centuries, support industries for farmers expanded and the costs of farm machinery and fertilizers fell, decreasing total costs for farmers.3. Long-Run Market Supply Curve- A curve that shows how the quantity supplied in a market varies as the market price varies after all the possible adjustments have been made, including changes in each firm’s plant and the number of firms in the market.a. Example : When there is an increase in the number of firms in an industry and each firm has made all of the necessary changes in plant size, then the industry is on its long-run market supply curve.4. Perfect Competition- A market in which there are many firms each selling an identical product. There are many buyers; there are no restrictions on entry into the industry; firms in the industry have no advantage over potential new entrants; and firms and buyers are well informed about the price of each firm’s product.a. Example : Every family in a small town owns a gas station. There are so many gas stations that no one can control the price of gas and no one can stop another family from opening another station. The gas station business in perfectly competitive.5.


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