Market Power and Structure

Abnormal profit

This arises when average revenue is greater than average cost (greater than the minimum return required by a firm to remain in a line of business).

Abuse of market power

When a firm acts with the intention to eliminate competitors or to prevent entry of new firms in a market.

Allocative efficiency

Achieved when just the right amount of goods and services are produced from society's point of view so that scarce resources are allocated in the best possible way. It is achieved when, for the last unit produced, price (P) is equal to marginal cost (MC), or more generally, if marginal social benefit (MSB) is equal to marginal social cost (MSC).

Anti-monopoly regulation

Laws and regulations that are intended to restrict anti-competitive behaviour of firms that are abusing their market power.

Average costs

Total costs per unit of output produced.

Average revenue

Revenue earned per unit sold; average revenue is thus equal to the price of the good.

Barriers to entry

Anything that deters entry of new firms into a market, for example, licenses or patents.

Business tax

Tax levied on the income of a business or corporation.

Capital gains tax

A tax on the profits realized from the sale of financial assets such as stocks or bonds.

Ceteris paribus

A Latin expression meaning "other things being equal".

Circular economy

An economic system that looks beyond the linear take-make-dispose model and aims to redefine growth, focusing on society-wide benefits. It is based on three principles: design out waste, keep products and materials in use, and regenerate natural systems.

Collusive oligopoly

A market where firms agree to fix price and/or to engage in other anticompetitive behaviour.

Competitive market

A market with many firms acting independently where no firm has the ability to control the price.

Competitive market equilibrium

Occurs if in a free competitive market, quantity demanded is equal to quantity supplied.

Competitive supply

When goods that a firm is producing use the same resources in their production process. The goods thus compete with each other for the use of the same resources.

Concentration ratios

The proportion of industry sales accounted for by the largest firms; the greater this proportion, the greater the degree of market power of the firms in the industry.

Corporate indebtedness

The sum of what a corporation owes to banks or other holders of its debt.

Corporate social responsibility

A corporate goal adopted by many firms that aims to create and maintain an ethical and environmentally responsible image.

Economies of scale

Falling average costs that a firm experiences when it increases its scale of operations.

Efficiency

In general, involves making the best use of scarce resources. May refer to producing at the lowest possible cost or to allocative efficiency where marginal social costs are equal to marginal social benefits or where social surplus is maximum.

Entrepreneurship

Refers to the ability of certain individuals to organize the other factors of production (land, labour, capital) and their willingness to take risks.

Equilibrium

A state of balance that is self-perpetuating in the absence of any outside disturbance.

Firm

An entity such as a business that uses factors of production in order to produce and sell goods and services and earn profits. It is an important decision maker in a market economy.

Firms

Productive units that transform inputs (factors of production) into output (goods and services), usually aiming at earning profits.

Game theory

A branch of mathematics that studies the strategic interaction of decision-makers that may be individuals, firms, countries, and so on.

Homogeneous product

Goods that are considered identical across firms in the eyes of consumers; examples include mostly primary sector goods like corn, wheat or copper.

Imperfect competition

A market structure where firms have a degree of market power as they face a negatively sloped demand curve and can thus set price.

Laissez faire

The view that if market forces are left alone unimpeded by government intervention the outcome will be efficient.

Law of diminishing marginal returns

A short-run law of production stating that as more and more units of the variable factor (usually labour) are added to a fixed factor (usually capital) there is a point beyond which total product continues to rise but at a diminishing rate or, equivalently, marginal product starts to decrease.

Long run in microeconomics

The period of time when all factors of production are variable.

Loss (economic)

Occurs when total costs of a firm are greater than total revenues. It is equal to total cost minus total revenue.

Marginal costs

The extra or additional costs of producing one more unit of output.

Marginal revenue

The extra or additional revenue that arises for a firm when it sells one more unit of output.

Market

Any arrangement where buyers and sellers interact to carry out an economic transaction.

Market concentration

The extent to which the total sales in a market are accounted for by the largest firms, providing an indication of the degree of market power in the industry. It is measured by the concentration ratio.

Market demand

The sum of the individual demand curves for a product of all the consumers in a market.

Market equilibrium

In a market this occurs at the price where the quantity of a product demanded is equal to the quantity supplied. This is the market clearing price since there is no excess demand or excess supply.

Market power

The ability of a firm (or group of firms) to raise and maintain price above the level that would prevail under perfect competition (or P > MC).

Market share

The percentage of total sales in a market accounted for by one firm.

Market supply

The horizontal sum of the individual supply curves for a product of all the producers in a market.

Money

Anything that is generally accepted as a means of payment for goods and services. It usually consists of currency and checking accounts.

Monopolistic competition

A market structure where there are many sellers, producing differentiated products, with no barriers to entry.

Monopoly

A market structure where there is only one firm in the industry, so the firm is the industry. There are high barriers to entry.

Natural monopoly

A monopoly that can produce enough output to cover the entire needs of a market while still experiencing economies of scale. Its average costs will therefore be lower than those of two or more firms in the market.

Non-collusive oligopoly

Firms in an oligopoly do not resort to agreements to fix prices or output. Competition tends to be non-price. Prices tend to be stable.

Non-price competition

Competition between firms that is based on factors other than price, usually taking the form of product differentiation.

Normal profit

The minimum return that must be received by a firm in order to stay in business. A firm earns normal profit when total revenue is equal to total cost, or when average revenue or price is equal to average cost.

Oligopoly

A market structure where there are a few large firms that dominate the market, with high barriers to entry.

Payoff matrix

A table showing all possible outcomes of decisions taken by decision-makers in game theory.

Perfect competition

A market structure where there is a very large number of small firms, producing identical products, with no barriers to entry or exit, and perfect information. All the firms are thus price takers.

Perfect information

Where all stakeholders in an economic transaction have access to the same information.

Price competition

Competition between firms that is based on price, for example, a firm that wants to increase its sales at the expense of other firms will lower its price.

Price maker

A firm that is able to influence the price at which it sells its product. Includes firms in all market structures except perfect competition.

Price taker

A firm that is unable to influence the price at which it sells its product, being forced to accept the price determined in the market. It includes firm in perfect competition.

Price war

Occurs when firms successively cut their prices in an effort to match the price cuts of other firms, resulting in lower profits, possibly losses.

Product differentiation

The process by which firms try to make their products different from the products of other firms in an effort to increase their sales. Differences involve product quality, appearance, services offered and many others.

Profit maximization

A possible objective of firms that involves producing the level of output where profits are greatest: where total revenue minus total cost is greatest or where marginal revenue equals marginal cost.

Revenues

Payments received by firms when they sell their output.

Short run in microeconomics

The period of time when at least one factor of production is fixed.

Social/community surplus

The sum combination of consumer surplus and producer surplus.

Social enterprise

A company whose main objective is to have a social impact rather than to make a profit for their owners or shareholders. It operates by providing goods and services for the market in an entrepreneurial and innovative fashion and uses its profits primarily to achieve social objectives.

Sustainability

Refers to the preserving the environment so that it can continue to satisfy needs and wants into the future. Relates to the concept of "sustainable development".

Sustainable development

Refers to the degree to which the current generation is able to meet its needs today but still conserve resources for the sake of future generations.

Total costs

All the costs of a firm incurred for the use of resources to produce something.

Total revenue

The amount of revenue received by a firm from the sale of a particular quantity of output (equal to price times quantity sold).

Welfare loss

A loss of a part of social surplus (consumer plus producer surplus) that occurs when there is market failure so that marginal social benefits are not equal to marginal private benefits.