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51 Cards in this Set

  • Front
  • Back
Deadweight Loss
The Reduction in total economic surplus that results from the adoption of a policy.
Pareto Efficient (Efficient)
A situation is efficient if no change is possible that will help some people without harming others.
Accounting Profit
The difference between a firm's total revenue and its explicit costs.

(Total Revenue)-(Explicit Costs)
Economic Profit (Excess Profit)
The difference between a firm's total revenue and the sum of its explicit and implicit costs.
Allocative Function of Price
To direct resources away from overcrowded markets and toward markets that are underserved.
Barrier to Entry
Any force that prevents firms from entering a new market.
Economic Rent
That part of the payment for a factor of production that exceeds the owner's reservation price.
Explicit Costs
The actual payments a firm makes to its factors of production and other suppliers.
Implicit Costs
The opportunity costs of the resources supplied by the firm's owners.
Normal Profit
The opportunity cost of the resources supplied by a firm's owners, equal to accounting profit minus economic profit.

(Accounting Profit)-(Economic Profit)
Rational Function of Price
To distribute scarce goods to those consumers who value them most highly.
Present Value
PV=M/r
M= Perpetual Annual Payment
r=Interest Rate
Time Value of Money
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.
Hurdle Method of Price Discrimination
The practice by which a seller offers a discount to all buyers who overcome some obastacle.
Imperfectly Competitive Firm (Price Setter)
A firm with at least some latitude to set its own price.
Marginal Revenue
The change in a firm's total revenue that results from a one-unit change in ouput.
Market Power
A firm's ability to raise the price of a good without losing all its sales.
Monopolistic Competition
An industry structure in which a large number of firms produce slightly differentiated products that are reasonably close substitutes for one another.
Natural Monopoly
A monopoly that results from economies of scale.
Oligopoly
An industry structure in which a small number of large firms produce products that are either close or perfect substitutes.
Rational Function of Price
To distribute scarce goods to those consumers who value them most highly.
Present Value
PV=M/r
M= Perpetual Annual Payment
r=Interest Rate
Time Value of Money
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.
Hurdle Method of Price Discrimination
The practice by which a seller offers a discount to all buyers who overcome some obastacle.
Imperfectly Competitive Firm (Price Setter)
A firm with at least some latitude to set its own price.
Marginal Revenue
The change in a firm's total revenue that results from a one-unit change in ouput.
Market Power
A firm's ability to raise the price of a good without losing all its sales.
Monopolistic Competition
An industry structure in which a large number of firms produce slightly differentiated products that are reasonably close substitutes for one another.
Natural Monopoly
A monopoly that results from economies of scale.
Oligopoly
An industry structure in which a small number of large firms produce products that are either close or perfect substitutes.
Economies of Scale
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.
Perfectly Discriminating Monopoly
A firm that charges each buyer exactly his or her reservation price.
Price Discrimination
The practice of charging different buyers different prices for essentially the same good or service.
Price Setter
A firm with at least some latitude to set its own price.
Cartel
A coalition of firms that agree to restrict output for the purpose of earning an economic profit.
Commitment Device
A way of changing incentives so as to make otherwise empty threats or promises credible.
Credible Promise
A promise to take an action that is in the promiser's interest to keep
Credible Threat
A threat to take an action that is in the threatener's interest to carry out.
Decision Tree (Game Tree)
A diagram that describes the possible moves in a game in sequence and lists the payoffs that correspond to each possible combination of moves.
Dominant Strategy
One that yields a higher payoff no matter what the other players in a game choose.
Dominated Strategy
Any other strategy available to a player who has a dominant strategy.
Nash Equilibrium
Any combination of strategies in which each player's strategy is his or her best choice, given the other player's choices.
Payoff Matrix
A table that describes the payoffs in a game for each possible combination of strategies.
Prisoner's Dilemma
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.
Tit-for-Tat
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.
With perfect competition
-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.
Profit Maximizing Decision Rule
-When MR>MC, Output should be increased.

-When MR<MC, Output should be reduced.

-Profits maximized at level of output for which MR=MC.
How price descrimination affects market outcomes.
-Increases both C.S. and P.S.

-Vastly increases the market for the item.
Forms of Imperfect Competition
-Perfect Monopoly
-Monopolistic Competition
-Oligopoly
Five Sources of Market Power
-Exclusive Control over Important Inputs

-Patents and Copyrights

-Government Licenses or Franchises

-Economies of Scale

-Network Economies
Importance of Free Entry
-Economic Profit would not tend to fall to zero over time.

-Must exist for allocative function of price to operate.