In economics, profit maximization is the short run or long run process by which a firm may determine the price, input, and output levels that lead to the greatest profit. Neoclassical economics, currently the mainstream approach to microeconomics, usually models the firm as maximizing profit.
In economics, elasticity is the measurement of how an economic variable responds to a change in another. It shows how easy it is for the supplier and consumer to change their behavior and substitute another good, the strength of an incentive over choices per the relative opportunity cost.
Price elasticity of demand is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price when nothing but the price changes. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price.
The break-even point (BEP) in economics, business—and specifically cost accounting—is the point at which total cost and total revenue are equal, i.e. "even". There is no net loss or gain, and one has "broken even", though opportunity costs have been paid and capital has received the risk-adjusted, expected return. In short, all costs that must be paid are paid, and there is neither profit nor loss.
A conventional marginal cost curve with marginal revenue overlaid. Marginal cost and marginal revenue are measured on the vertical axis and quantity is measured on it is the cost of producing one more unit of a good. Intuitively, marginal cost at each level of production includes the cost of any additional inputs required to produce the next unit. At each level of production and time period being considered, marginal costs include all costs that vary with the level of production, whereas other costs that do not vary with production are fixed and thus have no marginal cost. For example, the marginal cost of producing an automobile will generally include the costs of labor and parts needed for the additional automobile and not the fixed costs of the factory that have already been incurred. In practice, marginal analysis is segregated into short and long-run cases, so that, over the long run, all costs become marginal.
A limit price is a price, or pricing strategy, where products are sold by a supplier at a price low enough to make it unprofitable for other players to enter the market.
In economics and particularly in industrial organization, market power is the ability of a firm to profitably raise the market price of a good or service over marginal cost. In perfectly competitive markets, market participants have no market power. A firm with total market power can raise prices without losing any customers to competitors. Market participants that have market power are therefore sometimes referred to as "price makers" or "price setters", while those without are sometimes called "price takers". Significant market power occurs when prices exceed marginal cost and long run average cost, so the firm makes economic profit.
In microeconomics, marginal revenue (MR) is the additional revenue that will be generated by increasing product sales by one unit.
In economics, output elasticity is the percentage change of output divided by the percentage change of an input. It is sometimes called partial output elasticity to clarify that it refers to the change of only one input.
The cobweb model or cobweb theory is an economic model that explains why prices might be subject to periodic fluctuations in certain types of markets. It describes cyclical supply and demand in a market where the amount produced must be chosen before prices are observed. Producers' expectations about prices are assumed to be based on observations of previous prices. Nicholas Kaldor analyzed the model in 1934, coining the term "cobweb theorem", citing previous analyses in German by Henry Schultz and Umberto Ricci.
Cournot competition is an economic model used to describe an industry structure in which companies compete on the amount of output they will produce, which they decide on independently of each other and at the same time. It is named after Antoine Augustin Cournot (1801–1877) who was inspired by observing competition in a spring water duopoly. It has the following features:
The Ramsey problem, or Ramsey–Boiteux pricing, is a Second best policy problem concerning what price a public monopolist or a firm faced with an irremovable revenue constraint should set, in order to maximize social welfare. A closely related problem arises in relation to optimal taxation of commodities.
The Lerner index, formalized in 1934 by Abba Lerner, describes a firm's market power. It is defined by:
Shephard's lemma is a major result in microeconomics having applications in the theory of the firm and in consumer choice. The lemma states that if indifference curves of the expenditure or cost function are convex, then the cost minimizing point of a given good with price is unique. The idea is that a consumer will buy a unique ideal amount of each item to minimize the price for obtaining a certain level of utility given the price of goods in the market.
In economics, supply is the amount of something that firms, producers, labourers, providers of financial assets, or other economic agents are willing and able to provide to the marketplace. Supply is often plotted graphically with the quantity provided plotted horizontally and the price plotted vertically.
In mathematics, the elasticity or point elasticity of a positive differentiable function f of a positive variable at point a is defined as
In economics, income elasticity of demand measures the responsiveness of the quantity demanded for a good or service to a change in income. It is calculated as the ratio of the percentage change in quantity demanded to the percentage change in income. For example, if in response to a 10% increase in income, the quantity demanded for a good increased by 20%, the income elasticity of demand would be 20%/10% = 2.0.
Advertising elasticity of demand is an elasticity measuring the effect of an increase or decrease in advertising on a market. Although traditionally considered as being positively related, demand for the good that is subject of the advertising campaign can be inversely related to the amount spent if the advertising is negative.
A markup rule is the pricing practice of a producer with market power, where a firm charges a fixed mark-up over its marginal cost.
A monopoly price is set by a monopoly. A monopoly occurs when a firm is the only firm in an industry producing the product, such that the monopoly faces no competition. A monopoly has absolute market power, and thereby can set a monopoly price that will be above the firm's marginal (economic) cost, which is the change in total (economic) cost due to one additional unit produced.
