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Econ Exam #2 Vocab
Vocab Terms
63
Economics
Undergraduate 1
04/04/2009

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Term
Perfect competition
Definition
A market structure in which the decisions of INDIVIDUAL buyers and sellers have no effect on market price.
Term
Price taker
Definition
A competitive firm that must take the price of its product as given because the firmt cannot influence its price.
Term
Perfectly competitive firm
Definition
A firm that is such a small part of the total INDUSTRY that it cannot affect the price of the product it sells.
Term
Total revenues
Definition
The price per unit times the total quanity sold
Term
Marginal revenue
Definition
The change in total revenues resulting from a change in output (and sale) of one unit of the product in question.
Term
Profit-maximizing rate of production
Definition
The rate of production that maximizes total profits, or the differences between total revenues and total costs; also, the rate of production at which marginal revenue equals marginal cost.
Term
Short-run break-even price
Definition
The price at which a firm's total revenues equal its total costs. At the break-even price, the firm is just making a normal rate of return on its capital investment. (It is covering its explicit and implicit costs.)
Term
Short-run shutdown price
Definition
The price that covers average variable costs. It occurs just below the intersection of the marginal cost curve and the average variable cost-curve.
Term
Industry supply curve
Definition
The locus of points showing the minimum prices at which given quanitites will be forthcoming; also called the MARKET SUPPLY CURVE.
Term
marginal cost pricing
Definition
A system of pricing in which the pricing charged is equal to the opportunity cost to society of producing one more unit of the good of service in question. The opportunity cost is the marginal cost to society.
Term
Market failure
Definition
A situation in which an unrestrained market operation leads to either too few or too many resources going to a specific economic activity.
Term
What the characteristics of a perectly competitive market?
Definition
1) There are a large number of buyers and sellers, 2) firms in the industry produce and sell a homogeneous product, 3) information is equally accessible to both buyers and sellers, and 4) there are insignificant barriers to industry entry or exit.
Term
Monopolist
Definition
The single supplier of a good or service for which there is no close substitute. The monopolist therefore constitutes its entire industry.
Term
Natural monopoly
Definition
A monopoly that arises from the peculiar production characteristics in an industry. It usually arises when there are large economies of scale relative to the industry's demand such that one firmcan produce at a lower average cost than can be achieved by the multiple firms.
Term
Tariffs
Definition
Taxes on imported goods
Term
Cartel
Definition
An association of producers in an industry that agree to set common prices and output quotas to prevent competition.
Term
Price searcher
Definition
A firm that must determine the price-output combination that maximizes profit because it faces a downward-sloping demand curve.
Term
Price discrimination
Definition
Selling a given product at more than one price, with the price difference being unrelated to differences in marginal cost.
Term
Price differentiation
Definition
Establishing different prices for similar products to reflect differences in marginal cost in providing those commodities to different groups of buyers.
Term
Monopolistic competition
Definition
A market situation in which a large number of firms produce similar but not identitcal products. Entry into industry is relatively easy.
Term
Product differentiation
Definition
The distinguishing of products by brand name, color, and other minor attributes. Product differentiation occurs in other than perfectly competitive markets in which products are, in theory, omogeneous, such as wheat or corn.
Term
Direct marketing
Definition
Advertising targeted at specific consumers, typically in the form of postal mailings, telephone calls, or e-mail messages.
Term
Mass marketing
Definition
Advertising intended to reach as many consumers as possible, typically through television, newspaper, radio, or magazine ads.
Term
Interactive marketing
Definition
Advertising that permits a consumer to follow up directly by searching for more information and placing direct product orders.
Term
search good
Definition
A product with characteristics that enable an individual to evaluate the product's quality in advance of a purchase.
Term
Experience good
Definition
A product with characteristics that enable an individual to evaluate the product's quality can be established.
Term
Credence good
Definition
A product with qualities that consumers lack the expertise to assess without assistance.
Term
Informational advertising
Definition
Advertising that emphasizes transmitting knowledge about the features of a product.
Term
Persuasive advertising
Definition
Advertising that is intended to induce a consumer to purchase a particular product and discover a previously unknown taste for the item.
Term
short-run economies of operation
Definition
A distinguishing characteristic of an information product arising from declining short-run average total cost as more units of the product are sold.
Term
Oligopoly
Definition
A market situation in which there are very few sellers. Each seller knows that the other sellers will react to its changes in prices and quantities.
Term
Strategic dependence
Definition
A situation in which one firm's actions with respect to price, quality, advertising, and related changes may be strategically contered by the reactions of one or more other firms in the industry. Such dependence can exist only when there are a limited number of major firms in an industry.
Term
Vertical merger
Definition
The joining of a firm with another to which it sells an output or from which it buys an input.
Term
Horizontal merger
Definition
The joining of firms that are producing or sellinga similar product
Term
Concentration ratio
Definition
The percentage of all sales contributed by the leading four or leading eight firms in an industry; sometimes called the INDUSTRY CONCERTATION RATIO.
Term
Reaction function
Definition
The manner in which one oligopolist reacts to a change in price, output, or quality made by another oligopolist in the industry.
Term
Game theory
Definition
A way of describing the various possible outcomes in any situation involving two or more interacting individuals when those individuals are aware of the interactive nature of their situation and plan accordingly. The plans made by these individuals are knows as GAME STRATEGIES.
Term
Cooperative game
Definition
A game in which the players explicitly cooperate to make themselves better off. As applied to firms, it involves companies colluding in order to make higher than competitive rates of return.
Term
Noncooperative game
Definition
A game in which the players neither negotiate nore cooperate in any way. As applied to firms in an industry, this is the common situation in which there are relatively few firmsand each has some ability to change price.
Term
Zero-sum game
Definition
A game in which any gains within the group are exactly offset by equal losses by the end of the game.
Term
Negative-sum game
Definition
A game in which players as a group lose at the end of the game.
Term
Positive-sum game
Definition
A game in which players as a group are better off at the end of the game.
Term
Strategy
Definition
Any rule that is used to make a choice, such as "Always picks heads."
Term
Dominant strategies
Definition
Strategies that always yield the highest benefit. Regardless of what other players do, a dominant strategy will yield the most benefit for the player using it.
Term
Opportunisitic behavior
Definition
Actions that ignore the possible long-run benefits of cooperation and focus solely on short-run gains.
Term
Price leadership
Definition
A practice in many oligopolistic industries in which the largest firm publishes its price list ahead of its competitors, who then math those announced prices. Also called PARALLEL PRICING.
Term
Entry deterrence strategy
Definition
Any strategy undertaken by firms in an industry, either individually or toegether, with the intent or effect of raising the cost of entry into the industry by a new firm.
Term
Limit-pricing model
Definition
A model that hypothesizes that a grou pof colluding sellers will set the highest common price that they believe they can charge without new firms seeking to enter that industry in search of relatively high profits.
Term
Network effect
Definition
A situation in which a consumer's willingness to purchase a good or service is influence by how mnay others also buy or have bought the item.
Term
Positive market feedback
Definition
A tendency for a good or serice to come into favor with additional consumers because other consumers have chosen to buy the item.
Term
Negative market feedback
Definition
A tendency for a good or service to fall out of favor with more consumers because other consumers have stopped purchasing the item.
Term
Cost-of-serice regulation
Definition
Regulation that allows prices to reflect only the actual cost of production and no monoply profits.
Term
Rate-of-return regulation
Definition
Regulation that seks to keep the rate of return in an industry at a competitive level by not allowing prices that would produce economic profits.
Term
Lemons prolem
Definition
The potential for asymmetric information to bring about a general decline in product quality in an industry.
Term
Creative response
Definition
Behavior on the part of a firm that allows it to comply with the letter of the law but violate the spirit significantly lessening the law's effects.
Term
Capture hypothesis
Definition
A theory of regulatory behavior that predicts that regulators will eventually be captured by special interests of the industry being regulated.
Term
Monopolization
Definition
The possession of monopoly power in the relevant market and the willful acqusition or maintenance of that power, as distinguished from growth or development as consequenceof a superior proudct, business acumen, or historical accident.
Term
Market share test
Definition
The percentage of a market that a particular firm supplies; used as the primary measure of monoply power.
Term
Bundling
Definition
Offering two or more products for sale as a set
Term
Price elasticity of demand
Definition
The responsiveness of the quanitity demanded of a commodity to changes in its price; defined as the percentage change in quantity demanded divided by the percentage change in price.
Term
Elastic demand
Definition
A demand relationship in which a given percentage change in price will result in a larger percentage change in quantity demanded. Total expenditures and price changes are inversely related in the elastic region of the demand curve.
Term
Unit elastic of demand
Definition
A demand relationship in which the quanitity demanded changes exactly in proportion to the change in price. Total expenditures are invariant to price changes in theunit-elastic region of the demand curve.
Term
Inelastic demand
Definition
A demand reationship in which a given percentage change in price will result in a less than proportionate percentage change in the quanitity demanded. Total expenditures and price are directly related in the inelastic region of the demand curve.
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