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Key Concepts (4) - Coggle Diagram
Key Concepts (4)
Chapter 7
Opportunity cost
When taking an action implies forgoing the next best alternative action, this is the net benefit of the foregone alternative
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Research and development
Expenditures by a private or public entity to create new methods of production, products, or other economically relevant new knowledge
Marginal cost
The effect on total cost of producing one additional unit of output. It corresponds to the slope of the total cost function at each point. If cost increases by delta C when quantity is increased by delta Q, the marginal cost can be estimated by: MC = delta C / dleta Q
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Economies of scope
Cost savings that occur when two or more products are produced jointly by a single firm, rather being produced in separate firms
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Differential product
A product produced by a single firm that has some unique characteristics compared to similar products of other firms
Diseconomies of scale
These occur when doubling all of the inputs to a production process less than doubles the output. Also known as decreasing returns to scale
Willingness to pay (WTP)
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
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
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Normal profits
Corresponds to zero economic profit and means that the rate of profit is equal to the opportunity cost of capital
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Chapter 7
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Price markup
The price minus the marginal cost divided by the price. It is inversely proportional to the elasticity of demand for this good
Pareto efficient
An allocation with the property that there is no alternative technically feasible allocation in which at least one person would be better off, and nobody worse off
Monopoly
A firm that is the only seller of a product without close substitutes. Also refers to a market with only one seller
Consumer surplus, producer surplus, profit
- The consumer surplus is a measure of the benefits of participation in the market for consumers
- The producer surplus is closely related to the firm's profit, but it is not quite the same thing. Producer surplus is the difference between the firm's revenue and the marginal costs of every unit, but it doesn't allow for the fixed costs, which are incurred even when Q = 0
- The profit is the producer surplus minus fixed costs
- The total surplus arising from trade in this market, for the firm and consumers together, is the sum of consumer and producer surplus
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Pareto efficient
An allocation with the property that there is no alternative technically feasible allocation in which at least one person would be better off, and nobody worse off
Monopoly rents
A form of economic profits, which arise due to restricted competition in selling a firm's product
Gains from exchange
The benefits that each party gains from a transaction compared to how they would have fared without the exchange. Also known as gains from trade
Substitutes
Two goods for which an increase in the price of one leads to an increase in the quantity demand of the other
Economic rent
A payment or other benefit received above and beyond what the individual would have received in his or her next best alternative (reservation option)
Market power
An attribute of a firm that can sell its product at a range of feasible prices, so that it can benefit by acting as a price-setter (rather than a price-taker)
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Competition policy
Government policy and laws to limit monopoly power and prevent cartels. Also known as antitrust policy
Constrained optimization
A decision maker chooses the values of one or more variables:
- ....to achieve an objective
- ... subject to a constraint that determines the feasible set
Natural monopoly
A production process in which the long-run average cost curve is sufficiently downward-sloping to make it impossible to sustain competition among firms in this market