Glossary
Advertising
A non-price competition strategy involving promotional activities to inform and persuade consumers about a product, creating demand and brand loyalty.
Example:
Super Bowl commercials are a prime example of advertising, where companies spend millions to reach a vast audience and influence consumer preferences.
Allocatively Efficient
A state where resources are distributed to produce the combination of goods and services most preferred by society, occurring when price equals marginal cost (P=MC).
Example:
When the price of a concert ticket exactly reflects the marginal cost of providing that additional seat, the market for concert tickets is allocatively efficient.
Average Total Cost (ATC)
The total cost of production divided by the quantity of output, representing the per-unit cost of production.
Example:
A bakery calculates its average total cost by dividing its total expenses (flour, labor, rent) by the number of loaves of bread baked.
Branding and Packaging
Non-price competition strategies that involve creating a distinct identity for a product through its name, logo, design, and presentation.
Example:
The iconic red can and unique script of Coca-Cola are examples of effective branding and packaging that differentiate it from other soft drinks.
Demand Curve (Monopolistic Competition)
A downward-sloping demand curve that is more elastic than a monopolist's but less elastic than a perfectly competitive firm's due to product differentiation and substitutes.
Example:
If a popular coffee shop raises its prices, its demand curve will show that some customers will switch to a nearby competitor, but many loyal customers will remain.
Differentiated Products
Products that are similar but not identical across different firms, often due to variations in quality, features, branding, or perceived value.
Example:
While all smartphones perform similar functions, Apple's iPhones and Samsung's Galaxies are differentiated products due to their operating systems, design, and brand loyalty.
Excess Capacity
A situation in monopolistic competition where firms produce at an output level less than the output at which average total cost is minimized in the long run.
Example:
A restaurant with 50 tables that only fills 30 tables during peak hours is operating with excess capacity, meaning it could serve more customers without increasing its average cost per meal.
Identical Products
Products that are perfectly substitutable and indistinguishable from one another, a characteristic of perfect competition.
Example:
In the market for basic commodities like salt, one producer's salt is considered an identical product to another's.
Inefficient (Monopolistic Competition)
A characteristic of monopolistically competitive markets indicating that they do not achieve allocative or productive efficiency, leading to deadweight loss.
Example:
Because firms don't produce at the lowest possible cost or the socially optimal quantity, the market for designer jeans is considered inefficient.
Low Barriers to Entry
The relative ease with which new firms can enter or existing firms can exit a monopolistically competitive market, preventing long-run economic profits.
Example:
Starting a small online clothing boutique has low barriers to entry, as it doesn't require massive capital or complex regulations, allowing many new businesses to emerge.
Many Firms
A characteristic of monopolistic competition indicating a large number of sellers, though fewer than in perfect competition, each with a small market share.
Example:
In a city, there are many firms operating coffee shops, from large chains to small independent cafes, all vying for customers.
Monopolistic Competition
A market structure characterized by many firms offering slightly differentiated products, giving them some market power but facing competition from close substitutes.
Example:
The market for athletic shoes, where brands like Nike, Adidas, and Puma offer similar but distinct products, is an example of monopolistic competition.
Non-Price Competition
Strategies used by firms to attract customers based on factors other than price, such as branding, advertising, product features, or customer service.
Example:
A new energy drink company might engage in non-price competition by sponsoring extreme sports events and using celebrity endorsements to build brand image rather than just lowering its price.
Positive Economic Profit
A situation where a firm's revenues exceed its total economic costs (explicit and implicit), attracting new firms to the market in the short run.
Example:
If a new app becomes incredibly popular and generates revenue far beyond its development and operational costs, its creators are earning a positive economic profit.
Price Makers
Firms in monopolistic competition that have some control over the price of their differentiated product, allowing them to set prices above marginal cost.
Example:
Because their pizza has a unique secret sauce, 'Mama Mia's Pizzeria' can be a price maker, setting its prices slightly higher than competitors without losing all its customers.
Price Taker
A firm in a perfectly competitive market that has no control over the market price and must accept the prevailing price.
Example:
A single wheat farmer is a price taker because they must sell their crop at the market price, as their individual output is too small to influence it.
Product Attributes and Services
Non-price competition strategies focusing on unique features, quality, durability, or the level of customer support offered with a product.
Example:
A car manufacturer might emphasize its vehicle's advanced safety features and extended warranty as key product attributes and services to attract buyers.
Productively Efficient
A state where goods are produced at the lowest possible average total cost, occurring at the minimum point of the ATC curve.
Example:
A factory that produces cars using the fewest possible resources per vehicle, operating at its optimal scale, is considered productively efficient.
Profit Maximization (MR=MC)
The rule that firms follow to achieve the highest possible profit by producing the quantity where marginal revenue equals marginal cost.
Example:
A streaming service determines its optimal number of new shows to produce by applying profit maximization, ensuring the revenue from the last show equals its cost.
Unique Product
A product with no close substitutes, typically found in a monopoly market structure.
Example:
A pharmaceutical company holding a patent for a life-saving drug has a unique product with no direct competitors.
Zero Economic Profit (Normal Profit)
The long-run outcome in monopolistic competition where firms earn just enough to cover their explicit and implicit costs, meaning no incentive for entry or exit.
Example:
After accounting for all costs, including the opportunity cost of the owner's time and capital, a successful local bakery might be earning zero economic profit in the long run.