Firms with Market Power

Vocabulary flashcards covering core microeconomic concepts regarding firms with market power, cost structures, pricing decisions, welfare implications, and public competition policy.

Law of Demand

The principle stating that for most products, the demand curve is downward sloping: the higher the price, the lower the quantity demanded.

Willingness to Pay (WTP)

An indicator of how much a person values a good, measured by the maximum amount they would pay to acquire a unit of that good.

Total Cost

The sum of all costs incurred by a firm in the production process, consisting of fixed costs plus variable costs.

Revenue

The total money received from selling goods, calculated as the number of units sold times the price per unit ($\text{Price} \times \text{Quantity}$).

Economic Profit

Total revenue minus total costs, where total costs explicitly include both direct accounting costs and opportunity costs (such as the owner's time and the opportunity cost of invested capital).

Accounting Profit

Total revenue minus direct monetary payments and explicit costs (e.g., wages, energy, rent, materials), omitting opportunity costs.

Fixed Costs

Costs that must be paid regardless of the number of units produced by the firm.

Variable Costs

Costs that vary directly with the number of units produced.

Average Cost (AC)

The total cost of production divided by the total number of units produced ($AC = \frac{\text{Total Cost}}{Q}$).

Marginal Cost (MC)

The increase in total cost resulting from the production of one additional unit of output.

Increasing Returns to Scale

A technology property where doubling the amount of every input more than doubles the output, meaning production increases more than proportionally to inputs.

Economies of Scale

A situation where a firm's average cost decreases as the quantity produced increases, caused by cost advantages, technological advantages, or both.

Price Elasticity of Demand

A measure of the responsiveness of consumer demand to a price change, calculated as $\varepsilon = -\frac{\%\text{ change in demand}}{\%\text{ change in price}}$.

Elastic Demand

Demand characterized by a price elasticity strictly greater than $1$, where a $1\%$ increase in price leads to a drop in quantity demanded of more than $1\%$.

Inelastic Demand

Demand characterized by a price elasticity of less than $1$, indicating that consumers are relatively insensitive to price changes.

Market Power

The ability of a firm facing a downward-sloping demand curve to set a high price above marginal cost without losing all of its customers to competitors.

Monopoly

A market structure where a single firm sells a good that has no close substitutes, possessing the highest level of market power.

Monopolistic Competition

A market structure featuring many firms selling somewhat differentiated products, where each firm possesses some market power but individual decisions have negligible effects on competitors.

Natural Monopoly

An industry in which a single firm can supply the entire market at a lower average cost than two or more firms can, typically due to high fixed costs (e.g., water, electricity, gas utilities).

Marginal Revenue (MR)

The change in total revenue obtained by selling one additional unit of output. For firms with market power, marginal revenue is strictly less than price ($MR < P$).

Profit-Maximizing Quantity

The specific level of output where a firm's marginal revenue equals its marginal cost ($MR = MC$).

Consumer Surplus

The monetary measure of consumer welfare from trade, calculated as the difference between each buyer's willingness to pay and the price they actually pay.

Producer Surplus

The total gains received by a firm from market transactions, calculated as the difference between the price received per unit and the marginal cost of producing each unit ($\text{Producer Surplus} = \text{Profit} + \text{Fixed Cost}$).

Deadweight Loss (DWL)

The loss in total gains from trade (total surplus) occurring when a firm with market power sets price above marginal cost ($P > MC$) and restricts output below the socially optimal quantity.

Oligopoly

A market structure dominated by a small number of large firms whose decisions directly impact each other, giving rise to strategic interaction.

Article 101 TFEU

The pillar of EU competition policy that prohibits cartels and anti-competitive agreements between firms, including price-fixing, market-sharing, and output quotas, whether agreed formally or coordinated informally.

Article 102 TFEU

The pillar of EU competition policy that bans firms from abusing a dominant market position through anticompetitive behaviors like predatory pricing, refusing to supply rivals, or tying/bundling products.

EU Merger Regulation (EUMR)

The competition framework that reviews large corporate mergers before they occur to block or apply conditions to transactions that would significantly impede effective competition, balancing deadweight loss against efficiency gains.

State Aid Control

The pillar of EU competition policy that prevents member state governments from subsidizing domestic firms in ways that distort cross-border competition within the European single market.