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Microeconomics

Externalities

Externalities are a form of market failure. Externalities are defined as the spillover effects of the consumption or production of a good that is not reflected in the price of the good. For example, the production of steel results in pollution being released into the air, but the cost of the pollution to the environment is not reflected in the…
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Budget Constraint

When consumers’ income limits their consumption behaviors, this is known as a budget constraint. In other words, it’s all of the many combinations of goods/services that consumers are able to purchase in light of their particular income as well as the current prices of these particular goods/services. In the short term, budget constraints can be…
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Monopolistic Competition

In Monopolistic Competition, there are many small firms who all have minimal shares of the market. Firms have many competitors, but each one sells a slightly different product. Firms are neither price takers (perfect competition) nor price makers (monopolies). Example of Monopolistic Competition The athletic shoe market: When you walk into…
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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 Formula The profit maximization formula…
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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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