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51 Cards in this Set
- Front
- Back
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Deadweight Loss
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The Reduction in total economic surplus that results from the adoption of a policy.
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Pareto Efficient (Efficient)
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A situation is efficient if no change is possible that will help some people without harming others.
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Accounting Profit
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The difference between a firm's total revenue and its explicit costs.
(Total Revenue)-(Explicit Costs) |
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Economic Profit (Excess Profit)
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The difference between a firm's total revenue and the sum of its explicit and implicit costs.
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Allocative Function of Price
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To direct resources away from overcrowded markets and toward markets that are underserved.
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Barrier to Entry
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Any force that prevents firms from entering a new market.
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Economic Rent
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That part of the payment for a factor of production that exceeds the owner's reservation price.
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Explicit Costs
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The actual payments a firm makes to its factors of production and other suppliers.
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Implicit Costs
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The opportunity costs of the resources supplied by the firm's owners.
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Normal Profit
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The opportunity cost of the resources supplied by a firm's owners, equal to accounting profit minus economic profit.
(Accounting Profit)-(Economic Profit) |
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Rational Function of Price
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To distribute scarce goods to those consumers who value them most highly.
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Present Value
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PV=M/r
M= Perpetual Annual Payment r=Interest Rate |
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Time Value of Money
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The fact that a given dollar amount today is equivalent to a larger dollar amount in the future, becuase the money can be invested in an interest-bearing account in the meantime.
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Hurdle Method of Price Discrimination
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The practice by which a seller offers a discount to all buyers who overcome some obastacle.
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Imperfectly Competitive Firm (Price Setter)
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A firm with at least some latitude to set its own price.
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Marginal Revenue
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The change in a firm's total revenue that results from a one-unit change in ouput.
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Market Power
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A firm's ability to raise the price of a good without losing all its sales.
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Monopolistic Competition
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An industry structure in which a large number of firms produce slightly differentiated products that are reasonably close substitutes for one another.
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Natural Monopoly
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A monopoly that results from economies of scale.
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Oligopoly
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An industry structure in which a small number of large firms produce products that are either close or perfect substitutes.
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Rational Function of Price
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To distribute scarce goods to those consumers who value them most highly.
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Present Value
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PV=M/r
M= Perpetual Annual Payment r=Interest Rate |
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Time Value of Money
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The fact that a given dollar amount today is equivalent to a larger dollar amount in the future, becuase the money can be invested in an interest-bearing account in the meantime.
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Hurdle Method of Price Discrimination
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The practice by which a seller offers a discount to all buyers who overcome some obastacle.
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Imperfectly Competitive Firm (Price Setter)
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A firm with at least some latitude to set its own price.
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Marginal Revenue
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The change in a firm's total revenue that results from a one-unit change in ouput.
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Market Power
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A firm's ability to raise the price of a good without losing all its sales.
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Monopolistic Competition
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An industry structure in which a large number of firms produce slightly differentiated products that are reasonably close substitutes for one another.
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Natural Monopoly
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A monopoly that results from economies of scale.
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Oligopoly
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An industry structure in which a small number of large firms produce products that are either close or perfect substitutes.
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Economies of Scale
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A production process is said to have increasing returns to scale if, when all inputs are changed by a given proportion, output changes by the same proportion.
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Perfectly Discriminating Monopoly
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A firm that charges each buyer exactly his or her reservation price.
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Price Discrimination
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The practice of charging different buyers different prices for essentially the same good or service.
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Price Setter
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A firm with at least some latitude to set its own price.
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Cartel
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A coalition of firms that agree to restrict output for the purpose of earning an economic profit.
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Commitment Device
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A way of changing incentives so as to make otherwise empty threats or promises credible.
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Credible Promise
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A promise to take an action that is in the promiser's interest to keep
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Credible Threat
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A threat to take an action that is in the threatener's interest to carry out.
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Decision Tree (Game Tree)
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A diagram that describes the possible moves in a game in sequence and lists the payoffs that correspond to each possible combination of moves.
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Dominant Strategy
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One that yields a higher payoff no matter what the other players in a game choose.
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Dominated Strategy
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Any other strategy available to a player who has a dominant strategy.
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Nash Equilibrium
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Any combination of strategies in which each player's strategy is his or her best choice, given the other player's choices.
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Payoff Matrix
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A table that describes the payoffs in a game for each possible combination of strategies.
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Prisoner's Dilemma
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A game in which each player has a dominant strategy, and when each plays it, the resulting payoffs are smaller than if each had played a dominated strategy.
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Tit-for-Tat
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A strategy for the repeated prisoner's dilemma in which players cooperate on the first move, then mimic their partner's last move on each successive move.
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With perfect competition
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-If the firm raises it's price, sales will be zero.
-If the firm lowers its price, sales will not increase. -The firms demand curve is the horizontal line at the market price. |
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Profit Maximizing Decision Rule
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-When MR>MC, Output should be increased.
-When MR<MC, Output should be reduced. -Profits maximized at level of output for which MR=MC. |
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How price descrimination affects market outcomes.
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-Increases both C.S. and P.S.
-Vastly increases the market for the item. |
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Forms of Imperfect Competition
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-Perfect Monopoly
-Monopolistic Competition -Oligopoly |
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Five Sources of Market Power
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-Exclusive Control over Important Inputs
-Patents and Copyrights -Government Licenses or Franchises -Economies of Scale -Network Economies |
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Importance of Free Entry
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-Economic Profit would not tend to fall to zero over time.
-Must exist for allocative function of price to operate. |
