Parkin: Microeconomics Flashcards

Terms Definitions
Market Power
The ability to influence the market, and in particular the market price by influencing the total quantity offered for sale.
Monopoly
A firm that produces a good or service for which no close substitute exists and that is protected by a barrier that prevents other firms from selling that good or service.Two key features:-No close substitutes-Barriers to entry
Barriers to entry
Legal or natural constraints that protect a firm from potential competitors.
Legal monopoly
A market in which competition and entry are restricted by the granting of a public franchise, government license, patent or copyright.
Natural Monopoly
An industry in which economies of scale enable one firm to supply the entire market at the lowest possible cost.
Single-price monopoly
A firm that must sell each unit of its output for the same price to all its customers.
Price discrimination
The practice of selling different units of a good or service for different prices.
Economic rent
Consumer surplus, producer surplus, or economic profit in terms of monopoly.
Rent seeking
The pursuit of wealth by capturing economic rent.The people that do this pursue their goal in two main ways:-Buy a monopoly-Create a monopoly
Perfect price discrimination
This occurs if a firm is able to sell each unit of output for the highest price anyone is willing to pay for it.
Marginal cost pricing rule
A rule that sets the price of a good or service equal to the marginal cost of producing it.
Average cost pricing rule
A rule that sets price to cover cost including normal profit, which means setting the price equal to average total cost.
Monopolistic competition
A market structure in which:-a large number of firms compete-each firm produces a differentiated product-firms compete on product quality, price and marketing-firms are free to enter and exit
Product differentiation
What a firm practices if it makes a product that is slightly different from the products of competing firms.
Oligopoly
A market structure in which:-Natural or legal barriers prevent the entry of new firms-A small number of firms compete
Duopoly
An oligopoly market with two firms.
Cartel
A group of firms acting together-- colluding-- to limit output, raise price, and increase economic profit
Game theory
A tool for studying strategic behavior that takes into account the expected behavior of others and the recognition of mutual interdependence.
Strategies
All the possible actions of each player in a game.
Payoff matrix
A table that shows the payoffs for every possible action by each player for ever possible action by each other player.
Nash equilibrium
The outcome of a game that occurs when player A takes the best possible action given the action of player B and player B takes the best possible action given the action of player A.
Collusive agreement
An agreement between two or more producers to form a cartel to restrict output, raise the price, and increase profits.
Dominant strategy equilibrium
An equilibrium in which the best strategy of each player is to cheat regardless of the strategy of the other player.
Cooperative equilibrium
An equilibrium in which the players make and share the monopoly profit.
Contestable market
A market in which firms can enter and leave so easily that firms in the market face competition from potential entrants.
Limit pricing
A strategy that sets the price at the highest level that inflicts a loss on the entrant.
Market failure
A state in which the market does not allocate resources efficiently.
Political equilibrium
A situations in which the choices of voters, firms, politicians, and bureaucrats are compatible and in which no group can improve its position by making a different choice.
Regulation
Rules administered by a government agency to influence economic activity by determining prices, product standards and types, and the conditions under which new firms may enter an industry.
Antitrust law
A law that regulates and prohibits certain kinds of market behavior, such as monopoly and monopolistic practices.
Social interest theory
A theory that politicians supply the regulation that achieves an efficient allocation of resources.
Capture theory
A theory of regulation that states that regulation is in the self-interest of produces.
Marginal cost pricing rule
A rule that sets price equal to marginal cost.
Average cost pricing rule
A rule that sets price equal to average cost.
Rate of Return Regulation
A regulation that requires the firm to justify its price by showing that the price enables it to earn a specified target percent return on its capital.
Price cap regulation
A rule that specifies the highest price the firm is permitted to set.
Earnings sharing regulation
A regulation that if a firm's profits rise above a target level , they must be shared with the firm's customers.
Resale price maintenance
Agreement between a manufacturer and a distributor on the price at which the product will be sold.
Resale price maintenance
Agreement between a manufacturer and a distributor on the price at which the product will be sold.
Tying arrangement
An agreement to sell one product only.
Predatory pricing
The action of setting a low price to drive competitors out of business with the intention of setting a monopoly price when the competition has gone.
Externality
A cost or benefit that arises from production and falls on someone other than the producer, or a cost or benefit that arises from consumption and falls on someone other than the consumer.
Marginal private cost (MC)
The cost of producing an additional unit of a good or service that is borne by the producer of that good or service.
Marginal social cost
The cost of producing an additional unit of a good or service that falls on people other than the producer.
Marginal social cost
The marginal cost incurred by the entire society and is the sum of marginal private cost and marginal external cost.
Property rights
Rights that are legally established titles to the ownership, use, and disposal of factors of production and goods and services that are enforceable in the courts.
Coase theorem
The proposition that if property rights exist, if only a small number of parties are involved, and if transactions costs are low, then private transactions are efficient.
Transaction costs
The opportunity costs of conducting a transaction.
Pigovian taxes
Taxes used as an incentive for producers to cut back on pollution.
Marginal private benefit
The benefit from an additional unit of a good or service that the consumer of that good or service receives.
Marginal external benefit
The benefit from an additional unit of a good or service that people other than the consumer enjoy.
Marginal social benefit
The marginal benefit enjoyed by society.
Public provision
The production of a good or service by a public authority that receives its revenue from the government.
Subsidy
A payment that the government makes to private producers.
Voucher
A token that the government provides to households, which they can use to buy specified goods or services.
Intellectual property rights
Property rights for discoveries owned by the creators of knowledge.
Copyright
A government-sanctioned exclusive right granted to the inventor of a good, service, or productive process to produce, use, and sell the invention for a given number of years.
Excludable
A good or service or a resource is this if it is possible to prevent someone from enjoying the benefit of it.
Nonexcludable
A good or service or a resource is this if it is impossible to prevent someone from benefiting from it.
Rival
A good or service or a resource is this if its use by one person decreases the quantity available for someone else.
Nonrival
A good or service or a resource is this if its use by one person does not decrease the quantity available for someone else.
Private good
A good both rival and excludable.
Public good
A good that is both nonrival and nonexcludable.
Common resource
A good that is rival and nonexcludable.
Free-rider problem
The absence of an incentive for people to pay for what they consume.
Tragedy of the commons
The absence of incentive to prevent the overuse and depletion of a resource.
Principle of minimum differentiation
The tendency for competitors to make themselves similar to appeal to the maximum number of clients or voters.
Rational ignorance
The decision not to acquire information because the cost of doing so exceeds the expected benefit.
Social Interest Theory
The theory that predicts that governments make choices that result in inefficiency.
Public Choice Theory
The theory in which governments make choices that result in inefficiency due to ignorant voters.
Individual transferable quota
A production limit that is assigned to an individual who is free to transfer the quota to someone else.
Derived demand
A demand for a factor of production.
Marginal revenue product
The change in total revenue that results from employing one more unit of labor.
Labor union
An organized group of workers that aims to increase wages and influence other job conditions.
Monopsony
A market in which there is a single buyer.
Bilateral monopoly
A situation in which a single seller faces a single buyer.
Efficiency wage
A wage rate that a firm pays above the competitive equilibrium wage rate with the aim of attracting the most productive workers.
Renewable natural resources
Resources that are repeatedly replenished by nature.
Nonrenewable natural resources
Resources that nature does not replenish.
Economic rent
The income received by the owner of a factor of production over and above the amount required to induce that owner to offer the factor for use.
Net present value
The present value of the future flow of marginal revenue product generated by the capital minus the price of the capital.
Money income
Market income plus cash payments to households by the government.
Market income
Wages, interest, rent, and profit earned in factor markets, before paying income taxes.
Lorenz curve
A curve that graphs the cumulative percentage of income or wealth against the cumulative percentage of households.
Wealth
The value of the things that it owns at a point in time.
Gini ratio
The ratio of the area between the line of equality and the Lorenz curve to the entire area beneath the line of equality.
Poverty
A situation in which a household's income is too low to be able to buy the quantities of food, shelter, and clothing that are deemed necessary.
Progressive income tax
Taxes income at an average rate that increases with income.
Regressive income tax
Taxes income at an average rate that decreases with income.
Proportional income tax
Taxes income at a constant average rate, regardless of the level of income.
Big tradeoff
A tradeoff between equity and efficiency.
Uncertainty
A situation in which more than one event may occur but we don't know which one.
Risk
A situation in which more than one outcome may occur and the probability of each possible outcome can be estimated.
Utility of wealth
The amount of utility a person attaches to a given amount of wealth.
Expected utility
The average utility arising from all possible outcomes.
Economic information
Data on prices, quantities, and qualities of goods and services and factors of production.
Information cost
The cost of acquiring information on prices, quantities, and qualities of goods and services and factors of production.
Reservation price
The highest price that the buyer is willing to pay for a good.
Private information
Information that is available to one person but is too costly for anyone else to obtain.
Moral hazard
When one of the parties to an agreement has an incentive after the agreement is made to act in a manner that brings additional benefits to himself or herself at the expense of the other party.
Adverse selection
The tendency for people to enter into agreements in which they can use their private information to their own advantage and to the disadvantage of the less informed party.
Signal
An action taken outside a market that conveys information that can be used by that market.
Efficient market
A market in which the actual price embodies all currently available relevant information.
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