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