Glossary
Allocatively Efficient
A state where resources are distributed to produce the goods and services most desired by society, occurring when Price (P) equals Marginal Cost (MC).
Example:
When the price consumers are willing to pay for a smartphone equals the cost of producing one more smartphone, the market is allocatively efficient.
Average Total Cost (ATC)
The total cost of production divided by the total quantity of output, representing the per-unit cost of production.
Example:
If a bakery spends 5.
Average Variable Cost (AVC)
The total variable cost of production divided by the total quantity of output, representing the per-unit variable cost.
Example:
For a taxi service, the average variable cost per ride would include the cost of gas and the driver's wages divided by the number of rides.
Demand (D)
The quantity of a good or service that consumers are willing and able to purchase at various prices during a specific period.
Example:
As the price of concert tickets decreases, the demand for those tickets typically increases.
Economic Profit
The difference between total revenue and total economic costs (explicit and implicit costs), including the opportunity cost of resources.
Example:
If a business owner earns more than they could have earned in their next best alternative job, they are making an economic profit.
Identical Products
Goods or services that are perfect substitutes for one another, meaning consumers perceive no difference between products from different firms.
Example:
In a perfectly competitive market for basic commodities, one bushel of corn is considered an identical product to another, regardless of the farm it came from.
Long-Run Equilibrium
A stable state in a perfectly competitive market where firms earn zero economic profit, and there is no incentive for firms to enter or exit the market.
Example:
After new coffee shops enter the market due to initial high profits, the market eventually reaches long-run equilibrium where each shop earns only a normal profit.
Low Barriers to Entry/Exit
Conditions in a market that make it easy for new firms to enter or existing firms to leave, promoting competition.
Example:
The ease of setting up a small online t-shirt printing business demonstrates low barriers to entry, allowing many new entrepreneurs to join the market.
Marginal Cost (MC)
The additional cost incurred from producing one more unit of a good or service.
Example:
If producing one more pizza costs an additional 3.
Marginal Revenue (MR)
The additional revenue generated from selling one more unit of a good or service.
Example:
If selling one more handmade necklace brings in an extra 15.
Market Structure
The organizational characteristics of a market, including the number of firms, barriers to entry, control over price, and product differentiation.
Example:
Understanding the market structure of the smartphone industry helps explain why a few large companies dominate pricing and innovation.
Monopolistic Competition
A market structure with many firms selling differentiated products, allowing for some control over price, and relatively low barriers to entry.
Example:
The fast-food industry, with its many restaurants offering slightly different menus and branding, is a good example of monopolistic competition.
Monopoly
A market structure where a single firm controls the entire market for a product with no close substitutes, giving it significant control over price.
Example:
A local utility company providing electricity might operate as a monopoly due to the high costs and infrastructure required for entry.
No Non-Price Competition
The absence of competition based on factors other than price, such as advertising, branding, or product features.
Example:
Since all products are identical in perfect competition, a wheat farmer engages in no non-price competition; they don't need to advertise their wheat as 'better' than another's.
Normal Profit
The minimum profit necessary to keep a firm in operation in the long run, equal to zero economic profit.
Example:
If a coffee shop earns just enough to cover all its explicit and implicit costs, including the owner's opportunity cost, it is making a normal profit.
Oligopoly
A market structure dominated by a few large firms that are interdependent in their pricing and output decisions, often with high barriers to entry.
Example:
The global automobile industry, where a handful of major manufacturers produce most cars, is a classic oligopoly.
Perfect Competition
A market structure characterized by many small firms, identical products, low barriers to entry, and firms being price takers, leading to zero economic profit in the long run.
Example:
The market for basic agricultural commodities like corn often approximates perfect competition, where individual farmers have no control over the market price.
Price Takers
Firms that have no control over the market price and must accept the prevailing price for their goods or services.
Example:
A small wheat farmer is a price taker because they must sell their wheat at the market price, regardless of their individual output.
Productively Efficient
A state where goods and services are produced at the lowest possible average total cost, occurring when Price (P) equals the minimum Average Total Cost (ATC).
Example:
A factory that produces cars using the fewest possible resources per car is operating at a productively efficient level.
Short-Run Loss
A situation where a firm's total costs exceed its total revenue in the short run, meaning price is below average total cost but potentially above average variable cost.
Example:
A small bookstore might experience a short-run loss if sales decline, but it might continue operating if it can still cover its variable costs.
Short-Run Profit
A situation where a firm's total revenue exceeds its total costs (including implicit costs) in the short run, meaning price is above average total cost.
Example:
If a lemonade stand sells lemonade at a price higher than its average cost per cup, it is experiencing a short-run profit.
Shutdown
The decision by a firm to temporarily cease production in the short run because the market price is below its average variable cost.
Example:
A seasonal ice cream shop might choose to shutdown during the winter months if the revenue from sales cannot even cover the cost of ingredients and hourly wages.
Side-by-Side Graphs
A common graphical representation in perfect competition that shows the entire market on one graph and an individual firm within that market on another.
Example:
To illustrate how a change in market demand affects an individual firm, economists often use side-by-side graphs.
Supply (S)
The quantity of a good or service that producers are willing and able to offer for sale at various prices during a specific period.
Example:
When the price of oil rises, the supply of oil from producers tends to increase as it becomes more profitable to extract.