CHAPTER 12

A production function is the relationship between the quantity of inputs a firm

uses and the quantity of output it produces.
A fixed input is an input whose quantity is fixed for a period of time and cannot
be varied.
A variable input is an input whose quantity the firm can vary at any time.
The long run is the time period in which all inputs can be varied.
The short run is the time period in which at least one input is fixed.
The total product curve shows how the quantity of output depends on the
quantity of the variable input, for a given quantity of the fixed input.
The marginal product of an input is the additional quantity of output that is
produced by using one more unit of that input.

There are diminishing returns to an input when an increase in the quantity

of that input, holding the levels of all other inputs fixed, leads to a decline in
the marginal product of that input.
A fixed cost is a cost that does not depend on the quantity of output produced.
It is the cost of the fixed input.
A variable cost is a cost that depends on the quantity of output produced. It is
the cost of the variable input.
The total cost of producing a given quantity of output is the sum of the fixed
cost and the variable cost of producing that quantity of output.
The total cost curve shows how total cost depends on the quantity of output.
Total cost = Fixed cost + Variable cost or TC = FC + VC

Average total cost, often referred to simply as average cost, is total cost
divided by quantity of output produced.
A U-shaped average total cost curve falls at low levels of output, then rises at
higher levels.
Average fixed cost is the fixed cost per unit of output.
ATC = TOTAL COST / QUANTITY OF OUTPUT = TC/Q
Average variable cost is the variable cost per unit of output.
The long-run average total cost curve shows the relationship between output
and average total cost when fixed cost has been chosen to minimize average
total cost for each level of output.
There are increasing returns to scale when long-run average total cost
declines as output increases.
There are decreasing returns to scale when long-run average total cost
increases as output increases.
There are constant returns to scale when long-run average total cost is
constant as output increases.
CHAPTER 13
A price-taking producer is a producer whose actions have no effect on the
market price of the good or service it sells.
A price-taking consumer is a consumer whose actions have no effect on the
market price of the good or service he or she buys.
A perfectly competitive market is a market in which all market participants are
price-takers.
A producer’s market share is the fraction of the total industry output
accounted for By that producer’s output.
A good is a standardized product, also known as a commodity, when
consumers regard the products of different producers as the same good.
An industry has free entry and exit when new producers can easily enter into
an industry and existing producers can easily leave that industry.
Marginal revenue is the change in total revenue generated by an additional
unit of output.
The optimal output rule says that profit is maximized by producing the
quantity of output at which the marginal revenue of the last unit produced is
equal to its marginal cost.
The price-taking firm’s optimal output rule says that a price-taking firm’s profit
is maximized by producing the quantity of output at which the market price is
equal to the marginal cost of the last unit produced.
The marginal revenue curve shows how marginal revenue varies as output
varies.
The break-even price of a price-taking firm is the market price at which it earns
zero profits.
A firm will cease production in the short run if the market price falls below the
shut-down price, which is equal to minimum average variable cost.
The short-run individual supply curve shows how an individual producer's
profit-maximizing output quantity depends on the market price, taking fixed
cost as given.
The industry supply curve shows the relationship between the price of a good
and the total output of the industry as a whole.
The short-run industry supply curve shows how the quantity supplied by an
industry depends on the market price given a fixed number of producers.
There is a short-run market equilibrium when the quantity supplied equals the
quantity demanded, taking the number of producers as given.
A market is in long-run market equilibrium when the quantity supplied equals
the quantity demanded, given that sufficient time has elapsed for entry into
and exit from the industry to occur.
The long-run industry supply curve shows how the quantity supplied responds
to the price once producers have had time to enter or exit the industry. is a
market in which all market participants are price-takers.
CHAPTER 14

A monopolist is a firm that is the only producer of a good that has no close
substitutes. An industry controlled by a monopolist is known as a monopoly.
Market power is the ability of a firm to raise prices.
To earn economic profits, a monopolist must be protected by a barrier to
entry—something that prevents other firms from entering the industry.
A natural monopoly exists when increasing returns to scale provide a
large cost advantage to a single firm that produces all of an industry’s output.
Advanced Micro Devices (also known as AMD), which now produces chips
approximately as fast and as powerful as Intel chips.
A patent gives an inventor a temporary monopoly in the use or sale of an
invention.
A copyright gives the creator of a literary or artistic work sole rights to profit
from that work.
A quantity effect. One more unit is sold, increasing total revenue by the price
at
which the unit is sold (in this case, +$500).
A price effect. In order to sell that last unit, the monopolist must cut the
market
price on all units sold. This decreases total revenue (in this case, by 9 × −$50 =
−$450).
In public ownership of a monopoly, the good is supplied by the government or
by a firm owned by the government.
Price regulation limits the price that a monopolist is allowed to charge
A single-price monopolist offers its product to all consumers at the same price.
Sellers engage in price discrimination when they charge different prices to
different consumers for the same good.
Perfect price discrimination takes place when a monopolist charges each
consumer his or her willingness to pay—the maximum that the consumer
is willing to pay.
-The greater the number of prices the monopolist charges, the lower the
lowest
price—that is, some consumers will pay prices that approach marginal cost.
-The greater the number of prices the monopolist charges, the more money it
extracts from consumers.
The marginal revenue of a monopolist is composed of a quantity effect (the
price received from the additional unit) and a price effect (the reduction in the
price at which all units are sold).
Chapter 15
An oligopoly is an industry with only a small number of producers. A producer
in such an industry is known as an oligopolist.
When no one firm has a monopoly, but producers nonetheless realize that they
can affect market prices, an industry is characterized by imperfect competition.
In addition to perfect competition and monopoly, oligopoly and monopolistic
competition are also important types of market structure. They are forms of
imperfect competition.
Oligopoly is a common market structure, one in which there are only a few
firms, called oligopolists, in the industry. It arises from the same forces that
lead to monopoly, except in weaker form.
An oligopoly consisting of only two firms is a duopoly. Each firm is known as a
duopolist.
Sellers engage in collusion when they cooperate to raise their joint profits. A
cartel is an agreement among several producers to obey output restrictions in
order to increase their joint profits.
When firms ignore the effects of their actions on each others’ profits, they
engage in noncooperative behavior.
When a firm’s decision significantly affects the profits of other firms in the
industry, the firms are in a situation of interdependence.
The study of behavior in situations of interdependence is known as game
theory.
The reward received by a player in a game, such as the profit earned by an
oligopolist, is that player’s payoff.
A payoff matrix shows how the payoff to each of the participants in a two
player game depends on the actions of both. Such a matrix helps us analyze
situations of interdependence.
Prisoners’ dilemma is a game based on two premises: (1) Each player has an
incentive to choose an action that benefits itself at the other player’s expense;
and (2) When both players act in this way, both are worse off than if they had
acted cooperatively.
An action is a dominant strategy when it is a player’s best action regardless of
the action taken by the other player.
A Nash equilibrium, also known as a noncooperative equilibrium, is the result
when each player in a game chooses the action that maximizes his or her
payoff given the actions of other players, ignoring the effects of his or her
action on the payoffs received by those other players.
A firm engages in strategic behavior when it attempts to influence the future
behavior of other firms.
A strategy of tit for tat involves playing cooperatively at first, then doing what-
ever the other player did in the previous period.
When firms limit production and raise prices in a way that raises each others’
profits, even though they have not made any formal agreement, they are
engaged in tacit collusion.
An oligopolist who believes she will lose a substantial number of sales if she
reduces output and increases her price but will gain only a few additional sales
if she increases output and lowers her price, away from the tacit collusion out-
come, faces a kinked demand curve— very flat above the kink and very steep
below the kink.
Antitrust policy are efforts undertaken by the government to prevent
oligopolistic industries from becoming or behaving like monopolies.
A price war occurs when tacit collusion breaks down and prices collapse.
Product differentiation is an attempt by a firm to convince buyers that its
product is different from the products of other firms in the industry.
In price leadership, one firm sets its price first, and other firms then follow.
Firms that have a tacit understanding not to compete on price often engage in
intense nonprice competition, using advertising and other means to try to
increase their sales.
Chapter 16

Monopolistic competition is a market structure in which there are many

competing producers in an industry, each producer sells a differentiated
product, and there is free entry into and exit from the industry in the long run.
Short-run profits will attract entry of new firms in the long run. This reduces
the quantity each existing producer sells at any given price and shifts its
demand curve to the left. Short-run losses will induce exit by some firms in the
long run. This shifts the demand curve of each remaining firm to the right.
In the long run, a monopolistically competitive industry ends up in zero-profit
equilibrium: each firm makes zero profit at its profit-maximizing quantity.
Firms in a monopolistically competitive industry have excess capacity: they
produce less than the output at which average total cost is minimized.
A brand name is a name owned by a particular firm that distinguishes its
products from those of other firms.