Glossary

Every term, in one place

The same 41 definitions the lessons link to inline, wherever a sentence uses them — gathered here so a definition is never more than one page away.

A

allocative efficiencyallocatively efficient: Producing at the output where price equals marginal cost (P = MC) — resources go where consumers value them most, since the price paid for the last unit matches what it cost to produce. A price taker (perfect competition) achieves this at every output; a price maker facing a downward-sloping demand curve (monopolistic competition, oligopoly, monopoly) generally doesn't.
asymmetric informationinformation gap, information asymmetry: One party to a transaction or relationship knowing less than the other — here, a regulator lacking the detailed cost and performance information a firm has about itself, which limits how well it can set a price cap, profit cap, or quality standard.

B

barriers to entrybarrier to entry, barriers to entry and exit: Obstacles that make it difficult or costly for a new firm to enter a market — the spec names six sources: economies of scale, limit pricing, patents, branding, sunk costs and legal barriers. The same obstacles, viewed the other way round, work as barriers to exit too.
bilateral monopoly: A market with a single dominant buyer (a monopsonist) facing a single dominant seller, or sellers acting together as one bloc (e.g. via a collective agreement) — countervailing power on the selling side that the standard monopsony diagram alone can no longer pin a single price down against.

C

cartel: A formal or openly-coordinated agreement between firms to fix prices, restrict output, or divide up a market between them — the explicit form of collusion, and (in most jurisdictions, including the UK) illegal.
collusioncolluding, collude: An arrangement between firms — explicit (a cartel) or tacit (price leadership) — to avoid competing on price, letting them jointly restrict output and raise price closer to what a single monopolist would choose. Profitable for the firms as a group, but structurally unstable, because any individual firm can usually profit further still by secretly breaking the arrangement.
concentration ratioCRn, n-firm concentration ratio, CR3, CR4, CR5: The combined market share of the n largest genuine firms in an industry (CR3 = the three largest, CR5 = the five largest, and so on). A catch-all 'Others' category is never counted as a firm in the sum — the single most commonly examiner-reported error on this calculation.
contestabilitycontestable market: How easily a new firm could enter and exit a market, rather than how many firms currently trade in it — a market with just one firm can still be disciplined toward competitive pricing if entry is a credible threat, which makes it a genuinely separate question from firm count.

D

derived demandderived-demand: Demand for a factor of production (like labour) that exists only because of demand for the final good or service it helps produce — a rise or fall in demand for the product shifts demand for the labour that makes it in the same direction, and how elastic that product demand is feeds directly through into how elastic labour demand is too.
dynamic efficiency: A firm investing over time to cut future costs or improve its product — efficiency measured across periods, not a snapshot of one moment's output or price. Distinct from productive efficiency, which is about the current AC curve, not whether that curve is shifting down over time.

E

economies of scaleeconomy of scale, internal economies of scale: A long-run fall in long-run average cost as output increases, because there is no fixed factor being shared more efficiently — there is no fixed factor at all in the long run. A genuinely different mechanism from diminishing returns, even though both are commonly (and wrongly) described as "efficiency going up."
exclusive dealing agreementsexclusive dealing, exclusive dealing agreement: Contracts an established firm signs with its distributors or suppliers, requiring them to deal only with that firm and not with rivals — cutting a new entrant off from the routes to market it would need to actually compete, without touching price at all. Real, mark-scheme-credited alongside predatory pricing and limit pricing as an anti-competitive practice a business already in an oligopoly can use to keep new entrants out.

G

government failurelimits to government intervention: An outcome where government intervention fails to fix the market failure it targets, or makes it worse — on this paper, principally through regulatory capture, asymmetric information, inadequate regulator resources, or a lack of regulatory power.

I

interdependence: The defining feature of an oligopoly: because so few firms make up the whole market, one firm's price or output decision directly and noticeably affects specific, identifiable rivals, so each firm must anticipate its rivals' likely response before choosing its own strategy.

L

limit pricing: Setting a price low enough that a potential new entrant couldn't cover its own costs at that price, deterring entry before it happens. The spec lists it twice — as a barrier to entry (used pre-emptively, against entry that hasn't happened yet) and as a price-competition strategy (used against a rival that has already entered) — the same tool, aimed at a different target.

M

marginal costMC: The extra total cost of producing one more unit of output. In the short run, MC = wage rate ÷ marginal product of labour — which is why a rising marginal product pushes MC down, and a falling one (diminishing returns) pushes MC up.
marginal revenue productMRP, MRP_L, marginal revenue product of labour: The extra revenue a firm earns from employing one more unit of labour — marginal product multiplied by the extra revenue each unit of the resulting output earns. A profit-maximising firm hires labour until MRP_L falls to the wage rate, which is exactly why the MRP_L curve IS the firm's demand curve for labour.
maximum wagewage cap, wage ceiling: A legal wage ceiling aimed at reducing pay inequality at the top of the distribution. The standard evaluative risk is that workers able to move their labour elsewhere respond to a binding cap by exiting the regulated sector rather than simply accepting lower pay.
minimum wagenational minimum wage, NMW, wage floor: A legal wage floor below which pay cannot fall. In a competitive labour market a binding floor set above equilibrium creates unemployment; under monopsony, a floor set between the monopsony wage and the competitive wage can raise both the wage and employment together by removing the dominant employer's incentive to under-hire.
monopolistic competition: A market structure sharing perfect competition's other assumptions (many firms, free entry and exit) but with one changed: a differentiated, not homogeneous, product. That single difference gives each firm its own downward-sloping demand curve, keeping price above marginal cost and output below the cost-minimising level in both the short run and the long run, even once free entry has competed supernormal profit down to zero.
monopolypure monopoly, monopolist: A market with a single dominant seller, no close substitute, and barriers to entry high enough to block competition indefinitely — because there's no second firm, the monopolist's own demand curve IS the market demand curve (AR=D), which guarantees P>MC at its profit-maximising output.
monopsonymonopsony power, monopsonist, monopsony employer: A market with only one buyer, or one dominant buyer — of labour, or of any other input, not only labour. Because the monopsonist faces the whole market supply curve, its marginal cost of buying (MCL in a labour-market context) lies above the price or wage it actually pays (ACL) — hiring one more unit means raising the price paid on every existing unit too — so profit-maximising behaviour restricts both the price/wage paid and the quantity bought below the competitive level.

N

nationalisation: Bringing a firm into state ownership, removing the requirement to profit-maximise — a nationalised firm can price at marginal cost directly and redirect profit into investment or public services rather than shareholder dividends.
natural monopoly: A market where long-run average cost keeps falling across the entire range of output the market could realistically demand, so one firm supplying everyone is genuinely cheaper than splitting that same demand between rival firms — a cost-structure claim, not just 'a monopoly that occurs naturally.'
non-price competition: Competing for customers by means other than price — quality, advertising and branding, celebrity endorsement, product placement and after-sales service are the spec-named forms. It raises a firm's own costs and can still cut into profit; it isn't a cost-free alternative to a price war.

O

oligopolyoligopolistic, oligopolist: A market structure dominated by a small number of large firms, protected by high barriers to entry, where each firm's price and output decisions are interdependent — it cannot choose a strategy without considering how its rivals are likely to respond.
organic growthinorganic growth, internal growth, external growth: A firm expanding using its own resources and retained profit — new stores, products or markets — without acquiring another company. Slower and lower-risk than growth by merger or takeover (sometimes called inorganic or external growth), and often the only realistic route for a firm that can't access external finance.

P

payoff matrix: A grid showing each firm's profit under every combination of two firms' choices between two strategies (e.g. a high price or a low price) — the spec's own "simple two-firm/two-outcome" model for reasoning about interdependence, used instead of a demand curve because each firm's best choice depends on what the other one does.
perfect competition: A market structure resting on four assumptions — many buyers and sellers, a homogeneous product, perfect information, and free entry and exit — that together force every firm into being a price taker: AR = MR = P at every output. A perfectly competitive firm is allocatively efficient always, and productively efficient once free entry and exit have driven supernormal profit to zero in the long run.
predatory pricing: Pricing below cost specifically to force an existing rival out of the market — distinct from limit pricing, which targets a potential entrant that hasn't arrived yet rather than a rival that's already competing.
price competition: Competing for customers by changing the price itself — price wars, predatory pricing and limit pricing are the spec-named forms. A promotional discount still counts as price competition, even dressed up as an offer rather than a headline price cut, because the price paid per unit has changed.
price leadership: A form of tacit collusion in which one dominant firm sets its price and the other firms in the market are consistently observed to match it, without any formal agreement or direct communication between them.
price regulationprice cap, maximum price regulation: A government-imposed ceiling on what a firm — typically a monopolist — may charge, commonly set at P=MC to force the allocatively efficient output; a regulator's imperfect information about the firm's true costs can mean the cap misses that target in practice.
price war: A rapid, mutually damaging cycle of price cuts that follows when a collusive or tacitly stable pricing arrangement between oligopolists breaks down — often the predictable structural endpoint of the incentive to cheat shown in a payoff matrix, not a random event.
product differentiationdifferentiated product, differentiation: Making a firm's output a distinct, not perfectly substitutable, alternative to its rivals' — the single assumption separating monopolistic competition from perfect competition. Spec-named as three types: physical (real feature differences), marketing (advertising, branding, packaging), and distribution (shop, online, telephone).
productive efficiencyproductively efficient: Producing at the lowest point of the (long-run) average cost curve — no unit made more expensively than it has to be. A separate condition from allocative efficiency: a firm can sit at its AC minimum while still charging a price above marginal cost, or vice versa.
profit regulation: A cap on how much profit a firm is allowed to retain, used as an alternative to a direct price cap — it removes the incentive to raise price purely to extract supernormal profit, but can also reduce the funds available for investment in quality or capacity.

S

shutdown pointshutdown rule, shut down: The short-run rule for whether a loss-making firm should keep producing: if price still covers average variable cost, producing loses less money than shutting down does, because fixed costs are owed either way in the short run. A different, harsher threshold applies in the long run, where every cost — including fixed cost — can eventually be escaped.
sunk costssunk cost: Costs of entering a market that can't be recovered on exit (specialised, non-resellable equipment, for example) — the lower they are relative to total entry costs, the more contestable a market is, because a potential entrant risks less by trying and failing.

T

third-degree price discriminationprice discrimination: Charging different prices to different, separately-identifiable groups of customers for the same product, based on each group's differing price elasticity of demand — requires monopoly power, a genuine PED difference between groups, and a way to prevent resale between them.

X

X-inefficiencyx inefficiency, x-inefficient: A firm allowing average costs to drift above the minimum it could actually achieve — not a form of efficiency itself but its absence, usually because weak competitive pressure or diluted ownership incentives let slack persist. The same principal-agent mechanism behind diseconomies of scale, seen as a single-firm cost problem rather than an organisation-size one.