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Perfect competition
A market structure where many firms offer identical products.
Monopolistic competition
A market structure where many firms offer differentiated products.
Oligopoly
A market structure characterized by a small number of firms that dominate the market.
Monopoly
A market structure where a single firm controls the entire market.
Allocative efficiency
Achieved when P = MC.
Productive efficiency
Achieved when P = minATC.
Perfectly elastic demand curve
A horizontal demand curve faced by a perfectly competitive firm.
Marginal revenue (MR)
The additional revenue gained from selling one more unit of a good.
Marginal cost (MC)
The additional cost incurred from producing one more unit of a good.
Shutdown rule
If P < AVC, the firm shuts down in the short run.
Break-even point
When P = ATC, leading to zero economic profit (normal profit).
Economic profit
Profit that exceeds the normal profit, attracting new firms to the market.
Economic losses
When a firm's total costs exceed its total revenue, leading to some firms exiting the market.
Long-run economic profits
In perfect competition, they become zero due to free entry and exit.
Deadweight loss
A loss of economic efficiency that occurs when the equilibrium for a good or service is not achieved.
Elastic demand
Demand where total revenue increases when price decreases.
Inelastic demand
Demand where total revenue decreases when price decreases.
Unit elastic demand
A price change leads to no change in total revenue.
Price elasticity of demand formula
%ΔQd / %ΔP
Market failure
A situation where the free market fails to allocate resources efficiently.
Externalities
Costs or benefits that affect a third party not involved in a transaction.
Public goods
Goods that are non-excludable and non-rivalrous.
Positive externality
A benefit to society, like education or vaccines.
Negative externality
A cost to society, like pollution.
Government correction of negative externality
By imposing taxes or regulations.
Government encouragement of positive externalities
By providing subsidies.
