Latest Terms

Lerner Index

Lerner index is a measure of monopoly power which equals the markup over marginal cost as percentage of price. Its value ranges from 0, in case of a perfect competition, to 1, in case of a pure monopoly.

Profit Function

A profit function is a mathematical relationship between a firm’s total profit and output. It equals total revenue minus total costs, and it is maximum when the firm’s marginal revenue equals its marginal cost.

Shutdown Point

In short-run, a firm should shut down immediately if the market price of its product is lower than its average variable cost at its profit-maximizing output level. In long-run, it should shut down if the price of its product is less than its average total cost.

Newton Raphson Method

Newton Raphson Method is yet another numerical method to approximate the root of a polynomial. Newton Raphson Method is an open method of root finding which means that it needs a single initial guess to reach the solution instead of narrowing down two initial guesses.

Profit Maximization

Profit maximization rule (also called optimal output rule) specifies that a firm can maximize its economic profit by producing at an output level at which its marginal revenue is equal to its marginal cost.

Marginal Revenue

Marginal revenue is the incremental revenue generated from each additional unit. It is the rate at which total revenue changes. It equals the slope of the revenue curve and first derivative of the revenue function.

Cost Functions

A cost function is a mathematical relationship between cost and output. It tells how costs change in response to changes in output.

Average Variable Cost

In economics, average variable cost (AVC) is the variable cost per unit. Variable costs are such cost which vary directly with change in output. AVC equals total variable cost divided by output.

Marginal Cost

In economics, marginal cost is the incremental cost of additional unit of a good. It equals the slope of the total cost function. The marginal cost curve is generally U-shaped.

Minimum Efficient Scale

Minimum efficient scale (MES) is the smallest output level at which LRAC is at its minimum. It provides insight about competitiveness of an industry: an industry with high MES typically has few large firms.