Glossary ‹ 215luxury A good for which the proportional increase in
consumption exceeds the proportional increase in
income.
marginal The next unit, or increment of, an action.
marginal analysis Making decisions based upon
weighing the marginal benefits and costs of that
action. The rational decision maker chooses an
action if the MB ≥MC.
marginal benefit (MB)The additional benefit
received from the consumption of the next unit of a
good or service.
marginal cost (MC) The additional cost of produc-
ing one more unit of output.
marginal productivity theory The theory that a
citizen’s share of economic resources is propor-
tional to the marginal revenue product of his or
her labor.
marginal product (MPL) of labor The change in total
product resulting from a change in the labor input.
marginal resource cost (MRC) The change in a
firm’s total cost from the hiring of an additional
unit of an input.
marginal revenue product of labor (MRP)The
change in a firm’s total revenue from the hiring of
an additional unit of an input.
marginal tax rate The rate paid on the last dollar
earned, calculated by taking the ratio of the change
in taxes divided by the change in income.
marginal utility The change in an individual’s total
utility from the consumption of an additional unit
of a good or service.
marketA group with buyers and sellers of a good or
service.
market economy An economic system in which
resources are allocated through the decentralized
decisions of firms and consumers.
market equilibrium Exists at the only price where the
quantity supplied equals the quantity demanded.
Or, it is the only quantity where the price con-
sumers are willing to pay is exactly the price pro-
ducers are willing to accept.
market failure The inability of the free market to
allocate resources efficiently.
market power The ability to set a price above the
perfectly competitive level.
monopolistic competition A market structure char-
acterized by a few small firms producing a differ-
entiated product with easy entry into the market.
monopoly A market structure in which one firm is
the sole producer of a good with no close substi-
tutes in a market with entry barriers.
monopsony A factor market in which there is a sole
firm that has market power, i.e., a wage setter.
natural monopoly The case where economies of
scale are so extensive that it is less costly for one
firm to supply the entire range of demand than for
multiple firms to share the market.
necessity A good for which the proportional
increase in consumption is less than the propor-
tional increase in income.
negative externality The existence of spillover costs
upon third parties from the production of a good.
noncollusive oligopoly Models of industries in
which firms are competitive rivals seeking to gain
at the expense of their rivals.
nonrenewable resources Natural resources that
cannot replenish themselves.
normal goods A good for which demand increases
with an increase in consumer income.
normal profit The opportunity cost of the entrepre-
neur’s talents. Another way of saying the firm is
earning zero economic profit.
oligopoly A very diverse market structure character-
ized by a small number of interdependent large
firms, producing either a standardized or differen-
tiated product in a market with a barrier to entry.
opportunity cost The value of the sacrifice made to
pursue a course of action.
perfectly elastic Ed= °. In this special case, the
demand curve is horizontal, meaning consumers
have an instantaneous and infinite response to a
change in price.
perfectly inelastic Ed=0. In this special case, the
demand curve is vertical and there is absolutely no
response to a change in price.
positive externality The existence of spillover bene-
fits upon third parties from the production of
a good.
price ceiling A legal maximum price above which
the product cannot be sold.
price discrimination The sale of the same product to
different groups of consumers at different prices.
price elasticity of demand (Ed) Measures the sensi-
tivity of consumers’ quantity demanded for good X
when the price of good X changes.