Profit Maximization Rule

The Profit Maximization Rule states that if a firm chooses to maximize its profits, it must choose that level of output where Marginal Cost (MC) is equal to Marginal Revenue (MR) and the Marginal Cost curve is rising. In other words, it must produce at a level where MC = MR.Profit Maximization Rule FormulaThe profit maximization formula…
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Free Market

A free market economy is a type of economy that promotes the production and sale of goods and services, with little to no control or involvement from any central government agency. In a free market economy, firms and households act in self-interest to determine how resources get allocated, what goods get produced, and who buys the goods. A free…
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Oligopoly Market Structure

In an Oligopoly market structure, there are a few interdependent firms dominate the market. They are likely to change their prices according to their competitors. For example, if Coca-Cola changes their price, Pepsi is also likely to.Examples of Oligopolies In the wireless cell phone service industry, the providers that tend to dominate the…
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Derived Demand

The term “derived demand” refers to the demand for a good or service that itself arises out of the demand for a related or intermediate good or service. Thus the dependent demand often has a notable effect on the market price of the derived good.It’s important to note the difference between regular demand and derived demand. Regular demand is…
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Monopoly Market Structure

In a Monopoly Market Structure, there is only one firm prevailing in a particular industry. However, from a regulatory view, monopoly power exists when a single firm controls 25% or more of a particular market. For example, De Beers is known to have a monopoly in the diamond industry. A Natural Monopoly Market Structure is the result of natural…
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The Substitution Effect

The Substitution Effect is the effect of a change in the relative prices of goods on consumption patterns. It is the economic idea that as either prices rise or income decreases, consumers substitute cheaper alternatives for more expensive goodsThe substitution effect is harmful to economic prosperity overall because it limits the breadth of…
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