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 PERFECTLY COMPETITIVE INDUSTRY- is an industry in which producers are price-takers.

a PRODUCER’S MARKET SHARE- is the fractional 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.

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.

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

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.

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.

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.

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.

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 severalproducers to obey output restrictions in when firms ignore the effects of their actions on
each others’ profits, they engage in non cooperative 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 twoplayer game depends on
the actions of both. such a matrix helps us analyze situations of interdependence.

PRISONERS’ DILEMMA- 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 whatever 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 outcome, 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.

MONOPOLISTIC COMPETITION- is a market structure in which there are many competing producers in
an industry, eachbproducer sells a differentiated product, and there is free entry into and exit from the
industry in the long run.

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.
BRAND NAME- is a name owned by a particular firm that distinguishes its products from those of other
firms.

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.

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.

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.

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.

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.

Average variable cost-is the variable cost per unit of output.

minimum-cost output- is the quantity of output at which

average total cost – lowest the bottom of the U-shaped

average total cost curve.

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.
increasing returns to scale- when long-run average total cost declines as output increases.

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.