Individuals, firms, markets and market failure Key Terms

Marginal Cost

The additional cost incurred by producing one more unit of a good or service.

Average Cost

The total cost of production divided by the number of units produced.

Specialization

The focus of individuals or firms on a narrow range of tasks to improve efficiency.

Division of Labour

The allocation of different tasks to different workers to enhance productivity.

Diminishing Returns

The principle that as the quantity of one input increases while others are held constant, the marginal gain in output will eventually decline.

Returns to Scale

The change in output resulting from a proportional change in all inputs.

Marginal Cost

The additional cost incurred from producing one more unit of output.

Total Cost

The sum of fixed and variable costs incurred by a firm in production.

Economies of scale

The reduction in the average cost of production as a firm increases its output.

Diseconomies of scale

The increase in the average cost of production as a firm grows beyond an optimal size.

Marginal Revenue

The additional revenue gained from selling one more unit of a product.

Average Revenue

The revenue earned per unit sold, calculated as total revenue divided by quantity sold.

Fixed Costs

Costs that do not change with the level of output produced by a firm.

Variable Costs

Costs that vary directly with the level of output produced by a firm.

Technological Change

Improvements in production processes that enhance efficiency and productivity.

Cost Structure

The various costs that a firm incurs in the process of producing goods or services.

Allocative Efficiency

A situation in which resources are distributed in such a way that maximizes total benefit to society.

Barriers to Entry

Obstacles that make it difficult for new firms to enter a market, such as high startup costs or regulatory requirements.

Market Structure

The organizational and competitive characteristics of a market, which influence the behavior of firms within it.

Marginal Cost

The additional cost incurred by producing one more unit of a good or service.

Homogeneous Products

Products that are identical in nature and cannot be differentiated from one another by consumers.

Price Taker

A firm that must accept the market price as given because it is too small to influence the price.

Product Differentiation

The process of distinguishing a product from others to make it more attractive to a specific target market.

Supernormal Profit

Profit that exceeds the normal profit level, typically occurring in the short run in monopolistic competition.

Interdependence

A situation in oligopoly where the actions of one firm directly affect the decisions of other firms in the market.

Price Rigidity

The tendency of prices to remain stable despite changes in demand or supply, often observed in oligopolistic markets.

Monopoly

A market structure where a single seller dominates the market, with no close substitutes for the product.

Price Maker

A firm that has the power to set the price of its product rather than taking the market price as given.

Price Discrimination

The practice of charging different prices to different consumers for the same good or service based on their willingness to pay.

Market Power

The ability of a firm to influence the price of a good or service in the market.