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Parkin: Microeconomics
Ch 12-19 Terms
103
Economics
Undergraduate 1
03/13/2008

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Term
Market Power
Definition
The ability to influence the market, and in particular the market price by influencing the total quantity offered for sale.
Term
Monopoly
Definition
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
Term
Barriers to entry
Definition
Legal or natural constraints that protect a firm from potential competitors.
Term
Legal monopoly
Definition
A market in which competition and entry are restricted by the granting of a public franchise, government license, patent or copyright.
Term
Natural Monopoly
Definition
An industry in which economies of scale enable one firm to supply the entire market at the lowest possible cost.
Term
Single-price monopoly
Definition
A firm that must sell each unit of its output for the same price to all its customers.
Term
Price discrimination
Definition
The practice of selling different units of a good or service for different prices.
Term
Economic rent
Definition
Consumer surplus, producer surplus, or economic profit in terms of monopoly.
Term
Rent seeking
Definition
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
Term
Perfect price discrimination
Definition
This occurs if a firm is able to sell each unit of output for the highest price anyone is willing to pay for it.
Term
Marginal cost pricing rule
Definition
A rule that sets the price of a good or service equal to the marginal cost of producing it.
Term
Average cost pricing rule
Definition
A rule that sets price to cover cost including normal profit, which means setting the price equal to average total cost.
Term
Monopolistic competition
Definition
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
Term
Product differentiation
Definition
What a firm practices if it makes a product that is slightly different from the products of competing firms.
Term
Oligopoly
Definition
A market structure in which:

-Natural or legal barriers prevent the entry of new firms
-A small number of firms compete
Term
Duopoly
Definition
An oligopoly market with two firms.
Term
Cartel
Definition
A group of firms acting together-- colluding-- to limit output, raise price, and increase economic profit
Term
Game theory
Definition
A tool for studying strategic behavior that takes into account the expected behavior of others and the recognition of mutual interdependence.
Term
Strategies
Definition
All the possible actions of each player in a game.
Term
Payoff matrix
Definition
A table that shows the payoffs for every possible action by each player for ever possible action by each other player.
Term
Nash equilibrium
Definition
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.
Term
Collusive agreement
Definition
An agreement between two or more producers to form a cartel to restrict output, raise the price, and increase profits.
Term
Dominant strategy equilibrium
Definition
An equilibrium in which the best strategy of each player is to cheat regardless of the strategy of the other player.
Term
Cooperative equilibrium
Definition
An equilibrium in which the players make and share the monopoly profit.
Term
Contestable market
Definition
A market in which firms can enter and leave so easily that firms in the market face competition from potential entrants.
Term
Limit pricing
Definition
A strategy that sets the price at the highest level that inflicts a loss on the entrant.
Term
Market failure
Definition
A state in which the market does not allocate resources efficiently.
Term
Political equilibrium
Definition
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.
Term
Regulation
Definition
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.
Term
Antitrust law
Definition
A law that regulates and prohibits certain kinds of market behavior, such as monopoly and monopolistic practices.
Term
Social interest theory
Definition
A theory that politicians supply the regulation that achieves an efficient allocation of resources.
Term
Capture theory
Definition
A theory of regulation that states that regulation is in the self-interest of produces.
Term
Marginal cost pricing rule
Definition
A rule that sets price equal to marginal cost.
Term
Average cost pricing rule
Definition
A rule that sets price equal to average cost.
Term
Rate of Return Regulation
Definition
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.
Term
Price cap regulation
Definition
A rule that specifies the highest price the firm is permitted to set.
Term
Earnings sharing regulation
Definition
A regulation that if a firm's profits rise above a target level , they must be shared with the firm's customers.
Term
Resale price maintenance
Definition
Agreement between a manufacturer and a distributor on the price at which the product will be sold.
Term
Resale price maintenance
Definition
Agreement between a manufacturer and a distributor on the price at which the product will be sold.
Term
Tying arrangement
Definition
An agreement to sell one product only.
Term
Predatory pricing
Definition
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.
Term
Externality
Definition
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.
Term
Marginal private cost (MC)
Definition
The cost of producing an additional unit of a good or service that is borne by the producer of that good or service.
Term
Marginal social cost
Definition
The cost of producing an additional unit of a good or service that falls on people other than the producer.
Term
Marginal social cost
Definition
The marginal cost incurred by the entire society and is the sum of marginal private cost and marginal external cost.
Term
Property rights
Definition
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.
Term
Coase theorem
Definition
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.
Term
Transaction costs
Definition
The opportunity costs of conducting a transaction.
Term
Pigovian taxes
Definition
Taxes used as an incentive for producers to cut back on pollution.
Term
Marginal private benefit
Definition
The benefit from an additional unit of a good or service that the consumer of that good or service receives.
Term
Marginal external benefit
Definition
The benefit from an additional unit of a good or service that people other than the consumer enjoy.
Term
Marginal social benefit
Definition
The marginal benefit enjoyed by society.
Term
Public provision
Definition
The production of a good or service by a public authority that receives its revenue from the government.
Term
Subsidy
Definition
A payment that the government makes to private producers.
Term
Voucher
Definition
A token that the government provides to households, which they can use to buy specified goods or services.
Term
Intellectual property rights
Definition
Property rights for discoveries owned by the creators of knowledge.
Term
Copyright
Definition
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.
Term
Excludable
Definition
A good or service or a resource is this if it is possible to prevent someone from enjoying the benefit of it.
Term
Nonexcludable
Definition
A good or service or a resource is this if it is impossible to prevent someone from benefiting from it.
Term
Rival
Definition
A good or service or a resource is this if its use by one person decreases the quantity available for someone else.
Term
Nonrival
Definition
A good or service or a resource is this if its use by one person does not decrease the quantity available for someone else.
Term
Private good
Definition
A good both rival and excludable.
Term
Public good
Definition
A good that is both nonrival and nonexcludable.
Term
Common resource
Definition
A good that is rival and nonexcludable.
Term
Free-rider problem
Definition
The absence of an incentive for people to pay for what they consume.
Term
Tragedy of the commons
Definition
The absence of incentive to prevent the overuse and depletion of a resource.
Term
Principle of minimum differentiation
Definition
The tendency for competitors to make themselves similar to appeal to the maximum number of clients or voters.
Term
Rational ignorance
Definition
The decision not to acquire information because the cost of doing so exceeds the expected benefit.
Term
Social Interest Theory
Definition
The theory that predicts that governments make choices that result in inefficiency.
Term
Public Choice Theory
Definition
The theory in which governments make choices that result in inefficiency due to ignorant voters.
Term
Individual transferable quota
Definition
A production limit that is assigned to an individual who is free to transfer the quota to someone else.
Term
Derived demand
Definition
A demand for a factor of production.
Term
Marginal revenue product
Definition
The change in total revenue that results from employing one more unit of labor.
Term
Labor union
Definition
An organized group of workers that aims to increase wages and influence other job conditions.
Term
Monopsony
Definition
A market in which there is a single buyer.
Term
Bilateral monopoly
Definition
A situation in which a single seller faces a single buyer.
Term
Efficiency wage
Definition
A wage rate that a firm pays above the competitive equilibrium wage rate with the aim of attracting the most productive workers.
Term
Renewable natural resources
Definition
Resources that are repeatedly replenished by nature.
Term
Nonrenewable natural resources
Definition
Resources that nature does not replenish.
Term
Economic rent
Definition
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.
Term
Net present value
Definition
The present value of the future flow of marginal revenue product generated by the capital minus the price of the capital.
Term
Money income
Definition
Market income plus cash payments to households by the government.
Term
Market income
Definition
Wages, interest, rent, and profit earned in factor markets, before paying income taxes.
Term
Lorenz curve
Definition
A curve that graphs the cumulative percentage of income or wealth against the cumulative percentage of households.
Term
Wealth
Definition
The value of the things that it owns at a point in time.
Term
Gini ratio
Definition
The ratio of the area between the line of equality and the Lorenz curve to the entire area beneath the line of equality.
Term
Poverty
Definition
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.
Term
Progressive income tax
Definition
Taxes income at an average rate that increases with income.
Term
Regressive income tax
Definition
Taxes income at an average rate that decreases with income.
Term
Proportional income tax
Definition
Taxes income at a constant average rate, regardless of the level of income.
Term
Big tradeoff
Definition
A tradeoff between equity and efficiency.
Term
Uncertainty
Definition
A situation in which more than one event may occur but we don't know which one.
Term
Risk
Definition
A situation in which more than one outcome may occur and the probability of each possible outcome can be estimated.
Term
Utility of wealth
Definition
The amount of utility a person attaches to a given amount of wealth.
Term
Expected utility
Definition
The average utility arising from all possible outcomes.
Term
Economic information
Definition
Data on prices, quantities, and qualities of goods and services and factors of production.
Term
Information cost
Definition
The cost of acquiring information on prices, quantities, and qualities of goods and services and factors of production.
Term
Reservation price
Definition
The highest price that the buyer is willing to pay for a good.
Term
Private information
Definition
Information that is available to one person but is too costly for anyone else to obtain.
Term
Moral hazard
Definition
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.
Term
Adverse selection
Definition
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.
Term
Signal
Definition
An action taken outside a market that conveys information that can be used by that market.
Term
Efficient market
Definition
A market in which the actual price embodies all currently available relevant information.
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