← Market structures and marginal analysis
Reading the notation
A small, fixed set of terms carries every part of this standard — get them precise, since the real papers grade on graph labels and cost/profit vocabulary, not calculation.📖 Terms used in market structures
9 termsCover the right column and check you can say what each one means.
- MC (marginal cost)
- The extra cost of producing ONE more unit — the change in total cost, ΔTC ÷ ΔQ.
- MR (marginal revenue)
- The extra revenue from selling ONE more unit — ΔTR ÷ ΔQ. For a price TAKER, MR = price (a horizontal demand curve). For a price MAKER, MR < price, because selling one more unit means lowering the price on all units.
- Normal profit
- The minimum return needed to keep the firm operating in the industry — counted as a COST, not a reward. A firm earning exactly normal profit is NOT failing; the owner is still being paid for their capital and effort.
- Economic profit
- Total revenue minus ALL costs, including normal profit. Positive economic profit attracts new entrants (unless barriers block them); zero economic profit is the long-run competitive outcome.
- Price taker
- A firm facing a perfectly horizontal (elastic) demand curve — it can sell any quantity at the market price, but none above it. The defining feature of a firm in perfect competition.
- Price maker
- A firm facing a downward-sloping demand curve, so its own output decision affects the market price. The defining feature of a monopoly.
- Allocative efficiency
- Achieved where price = marginal cost (P = MC) — resources are allocated to produce exactly what consumers value at their true cost. A monopoly with P > MC is allocatively INefficient: a deadweight loss.
- Productive efficiency
- Achieved where a firm produces at the minimum point of its average cost curve — the lowest possible cost per unit.
- Barriers to entry
- Anything that stops new firms joining a profitable market — legal (patents, licences), natural (economies of scale), resource control, or brand loyalty. Barriers are the reason a monopoly can sustain economic profit in the long run, where a perfectly competitive firm cannot.