14.In a perfectly competitive marketall firms are
price-taking firmsand all consumers are price-taking
consumers—no one’s actions can influence the market
price. Consumers are normally price-takers, but firms
often are not. In a perfectly competitive industry,
every firm in the industry is a price-taker.
15.There are two necessary conditions for a perfectly com-
petitive industry: there are many firms, none of which
has a large market share,and the industry produces
astandardized productorcommodity—goods that
consumers regard as equivalent. A third condition is
often satisfied as well: free entry and exitinto and
from the industry.
578 section 10 Behind the Supply Curve: Profit, Production, and Costs
16.Many industries are oligopolies:there are only a few
sellers. Oligopolies exist for more or less the same rea-
sons that monopolies exist, but in weaker form. They
are characterized by imperfect competition:firms
compete but possess some market power.
17.Monopolistic competitionis a market structure
in which there are many competing firms, each pro-
ducing a differentiated product, and there is free
entry and exit in the long run. Product differentiation
takes three main forms: by style or type, by location,
and by quality. The extent of imperfect competition
can be measured by the concentration ratio,or the
Herfindahl-Hirschman Index.Explicit cost, p. 530
Implicit cost, p. 530
Accounting profit, p. 531
Economic profit, p. 532
Implicit cost of capital, p. 532
Normal profit, p. 534
Principle of marginal analysis, p. 537
Marginal revenue, p. 537
Optimal output rule, p. 537
Marginal cost curve, p. 538
Marginal revenue curve, p. 538
Production function, p. 542
Fixed input, p. 542
Variable input, p. 542
Long run, p. 542
Short run, p. 542
Total product curve, p. 543
Marginal product, p. 543
Diminishing returns to an input, p. 545Fixed cost, p. 548
Variable cost, p. 548
Total cost, p. 548
Total cost curve, p. 549
Average total cost, p. 552
Average cost, p. 552
U-shaped average total cost curve, p. 553
Average fixed cost, p. 553
Average variable cost, p. 553
Minimum-cost output, p. 555
Long-run average total cost curve, p. 561
Economies of scale, p. 562
Increasing returns to scale, p. 562
Diseconomies of scale, p. 562
Decreasing returns to scale, p. 563
Constant returns to scale, p. 563
Sunk cost, p. 563
Price-taking firm, p. 568
Price-taking consumer, p. 568Perfectly competitive market, p. 568
Perfectly competitive industry, p. 569
Market share, p. 569
Standardized product, p. 569
Commodity, p. 569
Free entry and exit, p. 570
Monopolist, p. 571
Monopoly, p. 571
Barrier to entry, p. 571
Natural monopoly, p. 571
Patent, p. 572
Copyright, p. 572
Oligopoly, p. 573
Oligopolist, p. 573
Imperfect competition, p. 573
Concentration ratios, p. 573
Herfindahl–Hirschman Index, p. 573
Monopolistic competition, p. 575Key Terms
1.Hiro owns and operates a small business that provides eco-
nomic consulting services. During the year he spends $55,000
on traveling to clients and other expenses, and the computer
that he owns depreciates by $2,000. If he didn’t use the com-
puter, he could sell it and earn yearly interest of $100 on the
money created through this sale. Hiro’s total revenue for the
year is $100,000. Instead of working as a consultant for the
year, he could teach economics at a small local college and
make a salary of $50,000.
a.What is Hiro’s accounting profit?
b.What is Hiro’s economic profit?
c.Should Hiro continue working as a consultant,^ or^ should
he teach economics instead?2.Jackie owns and operates a Web-design business. Her comput-
ing equipment depreciates by $5,000 per year. She runs the busi-
ness out of a room in her home. If she didn’t use the room as her
business office, she could rent it out for $2,000 per year. Jackie
knows that if she didn’t run her own business, she could return
to her previous job at a large software company that would pay
her a salary of $60,000 per year. Jackie has no other expenses.
a.How much total revenue does Jackie need to make in order
to break even in the eyes of her accountant? That is, how
much total revenue would give Jackie an accounting profit
of just zero?
b.How much total revenue does Jackie need to make in order for
her to want to remain self-employed? That is, how much total
revenue would give Jackie an economic profit of just zero?Problems