Glossary
Allocative Efficiency
A state where resources are distributed in a way that maximizes social welfare, occurring when the marginal benefit to society equals the marginal cost of production (P=MC).
Example:
When a city builds exactly the right number of public parks that people demand, reflecting their willingness to pay and the cost of building, it achieves allocative efficiency.
Average Total Cost (ATC)
The total cost of production divided by the total quantity of output produced.
Example:
If a factory produces 100 cars at a total cost of 50,000.
Consumer Surplus
The difference between the maximum price consumers are willing to pay for a good and the actual price they pay.
Example:
If you were willing to pay 35, you gained $15 in consumer surplus.
Deadweight Loss
The loss of economic efficiency that occurs when the equilibrium quantity of a good or service is not produced, representing lost potential gains from trade.
Example:
A tax on a product that reduces the quantity traded below the efficient level creates a deadweight loss for society.
Economic Profits
The difference between total revenue and total economic costs (including both explicit and implicit costs, like opportunity cost).
Example:
If a business earns 60,000 and the owner could have earned 10,000.
Marginal Cost (MC)
The additional cost incurred from producing one more unit of a good or service.
Example:
For a t-shirt printer, the cost of the ink and blank shirt for one more t-shirt represents the marginal cost of that additional unit.
Marginal Revenue (MR)
The additional revenue generated from selling one more unit of a good or service.
Example:
If a bakery sells an extra loaf of bread for 5.
Market Segregation
The ability of a firm to identify and separate different groups of consumers with varying price sensitivities or willingness to pay.
Example:
Movie theaters offering student discounts require proof of enrollment, demonstrating their use of market segregation to charge different prices.
Monopoly
A market structure where a single firm controls the entire market for a product or service, facing no direct competition.
Example:
Imagine a small town where only one company provides all the internet services; that company holds a monopoly on internet access.
Monopoly Power
The ability of a firm to influence the market price of its product by controlling supply, a necessary condition for price discrimination.
Example:
A pharmaceutical company holding a patent on a life-saving drug has significant monopoly power, allowing it to set high prices.
No Resale
A condition for successful price discrimination where consumers who buy the product at a lower price cannot resell it to those who would pay a higher price.
Example:
Concert tickets often have names printed on them or require ID at entry to enforce no resale, preventing scalpers from undermining tiered pricing.
Perfect Price Discrimination
A pricing strategy where a monopolist charges each customer the maximum price they are willing to pay, capturing all consumer surplus.
Example:
An antique dealer who negotiates a unique price with every buyer for each item, extracting their full willingness to pay, is engaging in perfect price discrimination.
Price Discriminating Monopoly
A single firm that controls the entire market and charges different prices to different consumers for the same product to maximize profits.
Example:
A theme park that offers different admission prices for locals versus tourists is acting as a price discriminating monopoly.
Price discrimination
A pricing strategy where a monopolist sells the same product at different prices to different buyers, based on their willingness to pay.
Example:
An airline charging different prices for the same seat on a flight depending on when the ticket was purchased is practicing price discrimination.
Producer Surplus
The difference between the price a producer receives for a good and the minimum price they would have been willing to accept for it.
Example:
If a farmer sells corn for 3, they gain $2 in producer surplus per bushel.
Pure Monopoly
A market structure where a single firm is the sole producer of a good with no close substitutes, and it charges a single price to all consumers.
Example:
Before deregulation, many local telephone companies operated as pure monopolies, providing landline services at a set rate.
Total Cost
The sum of all fixed and variable costs incurred by a firm in producing a given quantity of output.
Example:
For a software company, the sum of rent, salaries, and server expenses for a month represents its total cost of operation.
Total Revenue
The total amount of money a firm receives from the sale of its goods or services, calculated as price multiplied by quantity sold.
Example:
If a coffee shop sells 200 lattes at 800.
Uniformly-pricing monopoly
A type of monopoly that charges all consumers the same price for its product, setting the price where marginal revenue equals marginal cost.
Example:
A local utility company, acting as a uniformly-pricing monopoly, charges the same rate per kilowatt-hour to all residential customers.