econ201 terms
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| Necessities | goods to which we have a strong taste to have
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| Luxuries | goods we like to have
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| fixed costs | The cost of fixed resources (do not vary with output)
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| variable costs | The cost of variable resources (vary with output)
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| Total cost | sum of fixed costs and variable costs.
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| Average fixed cost (AFC) | AFC= Fixed cost / Total output
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| Average variable cost (AVC) | AVC = Variable cost / Total output. MC equals AVC when the latter is at its minimum. MC also equals ATC when the latter is at its minimum. MC = ΔTC / ΔQ = Δ Total Cost / Δ Output
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| Average total cost (ATC) | ATC = Total cost / Total output or ATC = AFC + AVC.
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| MC | change in total cost / change in total output. Or MC = ΔVC/ΔQ you get the same marginal cost in the short run because FC will cancel out.
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| MR | ΔTR / ΔOutput
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| Accounting cost | explicit dollar costs
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| Economic cost | explicit dollar costs + implicit costs.
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| Economic cost | Accounting cost + implicit costs
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| Implicit costs | the costs of the self-employed labor, self-owned capital …etc.
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| Accounting Costs | Take a retrospective view of a firm’s finances, Their purpose is to evaluate past performance, Equate cost with actual expenses and depreciation expenses, Depreciation expenses are calculated according to tax rules
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| Economic Cost | Forward-looking view of the firm’s finances, Purpose to evaluate future profitability, Equate costs with opportunity costs because the firm rearranges resources to minimize cost and increase expected profitability.
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| Economic Costs involving actual expenses | The cost = actual expenses + opportunity costs of own time, money, materials and buildings. Depreciation expenses = actual wear or tear.
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| Profit maximization rule | Marginal Revenue = ΔTR / ΔQ = ΔTC / ΔQ = Marginal Cost
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| The second profit maximization rule | The shutdown rule. (P = MC) If loss < fixed cost, the firm should not shut down (it should produce, q*>0). If loss > fixed cost, the firm should shutdown (it should not produce, q*= 0)
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| Loss with no Shutdown | Price is above Min AVC (or loss < FC)
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| Normal econ profit | total revenue – explicit cost - implicit cost = 0 (the 0 means normal economic profit pays all opportunity costs)
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| where Min ATC = P | ATC * q = P*q or TC = TR
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| There are two basic determinants of market structure in an oligopoly | 1.The number of firms in a product’s market. 2. The relative size of firms in this market (market concentration).
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| Determinants of Market Power | 1.Number of firms in the market. 2. Size of each firm in the market. 3.Barriers of entry 4. Availability of substitute goods or product differentiation
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| Concentration Ratio: C4 | This measure relates the size of few individual firms to the size of the overall market. It tells the share of the largest few (usually four) firms relative to the total market. Ex. C4 = (S1 +S2 + S3 +S4)/ Total industry sales = or (S1 +S2 + S3 +S4)/ ST
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| Measure of Industry concentration | There are two measures of share concentration: C4 and The Herfindahl–Hirschman index (HHI).
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| Company’s total share of market | wi = Si / ST
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| The Herfindahl–Hirschman index (HHI) | This is the second quantitative measure of market concentration and this measure is used in courts. Let firm i’s share of total industry output denoted by wi = Si / ST
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| The four-firm concentration ratio | C4 = (S1 + S2 + S3 + S4)/ST
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