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34 Cards in this Set
- Front
- Back
Market-Segment Price Discrimination |
A firm charges different prices to different groups for the same product Group with inelastic demand: larger markup Group with elastic demand: smaller markup |
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Perfect Price Discrimination |
A firm charges different prices to different individuals for the same product or high price with different discounts to different buyers Maximizes gains from trade with all gains going to seller |
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Conditions for Price Discrimination |
Market Power Identifiable demand differences Controllable resale of product |
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Irrationality
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MB: happiness from false but comforting beliefs MC: losses from false but comforting beliefs |
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Rational Irrationality
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Irrationality =/= stupidity More information worsens the problem |
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Tying |
Increases profits when willingness to pay correlates with quantity of variable good used. |
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Bundling
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Price discrimination in which several products can be purchased as a bundle only When buyers will pay similar amounts for each component, both are equally profitable |
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Cartel
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"collusion" |
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Why are cartels unstable? |
Entry of new firms Cheating |
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Incentive to Cheat |
--> Self-interest leads both firms to an inferior outcome |
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Sources of Market Power |
Government barriers Economies of scale Innovation |
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Market Power |
Ability to raise prices above marginal cost without firms entering the market Firm with market power is constrained by its demand curve |
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Solutions to Prisoner's Dilemma |
Repeated Games: prisoner will cheat less when they're punished in subsequent games Government Restraints: use government to force the game to optimal outcome Self-Restraints: Individuals impose costs on themselves to force optimal outcome |
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Prisoner's Dilemma |
Mutually beneficial cooperation can be difficult |
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Positive Sum Activity
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When innovation creates rents, competition for rents is a positive sum activity |
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Rents |
Profits |
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Invisible Hand Property |
Losses cause resources to leave value destroying industries Profits cause resources to enter value creating industries |
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Creative Destruction |
Eg. Netflix over Blockbuster, PC drop after iPad |
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Diffusion
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Self interest encourages the spread of valuable ideas |
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Competitive Markets
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Identical outputs Free entry and exits |
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Marginal Revenue
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P=MR |
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MR > MC
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Firm will produce more |
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MR < MC
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Firm will produce less |
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MR = MC
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Firm has maximized profits |
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MC < AC |
Average cost falls |
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MC > AC
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P > AC |
Firms enter the market |
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P < AC |
Firms exit the market |
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P = AC
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Firm breaks even |
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Game Theory |
Understanding behavior when the outcome depends on the choice of all involved persons |
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Negative Sum Activity |
When government barriers create rents, competition for rents is a negative-sum activity "rent seeking" |
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Rational Ignorance
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Ignorance =/= Stupidity More information alleviates the problem "miracle of aggregation" MC: effort to acquire and understand information MB: fewer costly errors due to false beliefs |
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Rationally Ignorant Beliefs
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Weakly-held beliefs Receptive to evidence |
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Implications of Rational Ignorance
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Favor interest groups at the expense of the general population |