44 Cards in this Set
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profit
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Profit = total revenue - total cost
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total revenue
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TR = P x Q
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total cost
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the cost of producing a given quantity of output. includes opportunity cost not just money costs.
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explicit cost
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cost that requires a money outlay. e.g. rent, electricity, etc.
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implicit cost
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a cost that does not require an outlay of money. e.g. opportunity cost
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economic profit
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total revenue minus total costs including implicit costs
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accounting profit
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total revenue minus explicit costs
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fixed costs
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costs that do not vary with output
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variable costs
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costs that do vary with output
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formula for total costs
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Total Cost (TC) = Fixed Costs (FC) + Variable Costs (VC)
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marginal revenue (MR)
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the change in total revenue from selling an additional unit. for a firm in a competitive industry, MR = Price
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marginal cost (MC)
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the change in total cost from producing an additional unit
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average cost
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cost per barrel, that is the total cost of producing Q barrels divided by Q: AC = TC/Q
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short run
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the period before exit or entry can occur
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long run
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the time after all exit or entry has occurred
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zero profits
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normal profits, occur when P=AC. at this price the firm is covering all its costs, including enough to pay labor and capital their ordinary opportunity costs.
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sunk cost
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a cost that once incurred can never be recovered
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increasing cost industry
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costs increase with greater industry output, shown by an upward-sloping supply curve
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constant cost industry
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an industry in which industry costs do not change with greater output, shown with a flat supply curve
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decreasing cost industry
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costs decrease with greater industry output, shown by a downward-sloping supply curve
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conditions for a competitive industry
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1. The product being sold is similar across sellers. 2. There are many buyers and sellers, each small relative to the total market. 3. There are many potential sellers.
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Invisible Hand Property 1
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even though no actor in a market economy intends to do so, in a free market P=MC1=MC2=...=MCN and, as a result, the total industry costs of production are minimized.
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Invisible Hand Property 2
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to use our limited resources most effectively, we would like resources to flow from low-profit industries to high-profit industries
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elimination principle
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above-normal profits are eliminated by entry and below-normal profits are eliminated by exit
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market power
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the power to raise price above marginal cost without fear that other firms will enter the market
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monopoly
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firm with market power
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economies of sale
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the advantages of large-scale production that reduce average cost as quantity increases
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natural monopoly
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said to exist when a single firm can supply the entire market at a lower cost than two or more firms
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barriers to entry
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factors that increase the cost to new firms of entering an industry
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arbitrage
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taking advantage of price differences for the same good in different markets by buying low in one market and selling high in another
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perfect price discrimination
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each customer is charged his or her maximum willingness to pay
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tying
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occurs when to use one good, the consumer must use a second good that is sold by the same firm. A firm can price-discriminate by tying two goods and carefully setting their prices
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bundling
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requiring that products be bought together ina bundle or package
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cartel
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group of suppliers that tries to act as if they were a monopoly
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oligopoly
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market that is dominated by a small number of firms
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monopolistic competition
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a market with a large number of firms selling similar but not identical products
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strategic decision making
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decision making in situations that are interactive
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dominant strategy
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a strategy that has a higher payoff than any other strategy no matter what the other player does
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prisoner's dillemma
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describes situations where the pursuit of individual interest leads to a group outcome that is in the interest of no one
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antitrust laws
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give the government the power to regulate or prohibit business practices that may be anticompetitive
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nash equilibrium
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a situation in which no player has an incentive to change his or her strategy unilaterally
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coordination game
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one in which the players are better off if they choose the same strategies than if they choose different strategies and there is more than one strategy on which they potentially coordinate
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contestable market
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a market is contestable if a competitor could credibly enter and take away business from the incumbent
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switching costs
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the costs of switching purchases from one firm to another. firms sometimes try to raise switching costs to reduce competitions for their customers.
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