Glossary
Consumers
Individuals or households who purchase goods and services for their own use or satisfaction.
Example:
When you buy a new video game, you are acting as a consumer in the market.
MR = MC (Profit-Maximizing Rule)
The fundamental rule stating that a firm maximizes its profit by producing the quantity of output where marginal revenue equals marginal cost.
Example:
A t-shirt company will continue to produce shirts as long as the additional revenue from selling one more shirt (MR) is greater than or equal to the additional cost of making it (MC), stopping precisely where MR = MC.
Marginal Analysis
An examination of the additional benefits of an activity compared to the additional costs of that activity.
Example:
A student uses marginal analysis when deciding whether to study for one more hour, weighing the potential improvement in their grade against the lost sleep.
Marginal Cost (MC)
The additional expense incurred by a firm to produce one more unit of a good or service.
Example:
If producing one more custom-designed sneaker adds 20.
Marginal Revenue (MR)
The additional income a firm receives from selling one more unit of a good or service.
Example:
If a coffee shop sells an extra latte for 5.
Market Structures
The organizational characteristics of a market, including the number of firms, the nature of competition, and the ease of entry and exit.
Example:
Understanding different market structures helps explain why prices are stable in a perfectly competitive market but can be controlled by a single firm in a monopoly.
Producer Theory
A branch of microeconomics that studies how firms make decisions about production, cost, and supply to maximize their profits.
Example:
Understanding producer theory helps explain why a bakery might decide to increase its bread production when flour prices fall.
Producers
Individuals, firms, or organizations that create and supply goods and services to the market.
Example:
A company that manufactures smartphones is a producer in the electronics industry.
Profit Maximization
The process by which a firm determines the output level and price that yield the greatest possible profit.
Example:
A software company aims for profit maximization by finding the optimal number of software licenses to sell, balancing development costs and potential sales revenue.
Profits
The financial gain realized when the revenue from selling goods or services exceeds the costs incurred in producing them.
Example:
A lemonade stand earns profits when the money from selling lemonade is more than the cost of lemons, sugar, and cups.
Theory of the Firm
The economic model that explains how businesses behave, focusing on their goal of profit maximization and how they achieve it.
Example:
The theory of the firm helps us analyze why a streaming service might invest heavily in new content to attract more subscribers.