Microeconomics Iba

Front 1

Accounting Profits

Back 1

Total revenue minus the dollar costs of producing the goods or services.

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Net Present Value

Back 2

The present value on the income stream generated by a project minus the current costs of the project.

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(FV/(1+i)^n)-C0

Back 3

Formula for the calculation of Net Present Value.
NPV = (FV/(1+i)^n)-C0

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Opportunity Cost

Back 4

The cost of the explicit and implicit resources that are foregone when a decision is made.

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Economic Profits

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The difference between total revenue and total opportunity costs.

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Present Value

Back 6

The amount that would have to be invested today at the prevailing interest rate to generate the given future value. (The higher the interest rate, the lower the present value of the future amount)

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FV/(1+i)^n

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Formula for the calculation of Present Value.
PV = FV/(1+i)^n

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Normal Good

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A good for which an increase in income leads to an increase in the demand for the good.

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Marginal Benefit

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The change in total benefits arising from a change in the managerial control variable Q.

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Incremental Revenues

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The additional revenues that stems from a yes-or-no decision.

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Incremental Costs

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The additional costs that stem from a yes-or-no decision.

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Market Demand Curve

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A curve indicating the total quantity of a good all consumers are willing and able to purchase at each possible price, holding the price of related goods, income, advertising and other variables constant.

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Marginal Costs

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The change in total costs arising from a change in the managerial control variable Q.

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Inferior Good

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A good for which an increase in income leads to a decrease in demand.

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Substitutes

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Goods for which an increase in price leads to an increase in demand for the other good (e.g. Pepsi & Cola)

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Complements

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Goods for which an increase in price leads to a decrease in the demand for the other good (e.g. Cars & Gasoline)

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Excise Tax

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A tax on each unit of output sold.

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Ad-volorem Tax

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A tax calculated as a percentage of the price of the good sold.

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Demand Function

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A function that describes how much of a good is purchased at alternative prices of that good and related goods, alternative income levels, and alternative values of other variables affecting the demand.

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Consumer Surplus

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The 'profit' consumers make when purchasing a good: the difference between the purchase price and personal value of the product.

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Producer Surplus

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The profit producers make when selling a profit. (Sales Price - Costs of Production)

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Price Ceiling

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The maximum legal price that can be charged in a market.

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Full Economic Price

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The dollar amount paid to a firm under a price ceiling plus the non-pecuniary price.

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Own-Price Elasticity

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A measure of the responsiveness of the quantity demanded of a good to a change in the price of that good; the percentage change in quantity demanded divided by the percentage change in the price of the good.

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Elasticity

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A measure of the responsiveness of one variable to changes in another; the percentage change in one variable that arises due to a given percentage change in another variable.

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Cross-Price Elasticity

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A measure of the responsiveness of the demand for a good to changes in price of a related good: the % change in the quantity demanded for one good divided by the % change in the price of a related good.

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Price Floor

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The minimum legal price that can be charged in a market.

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Log-Linear Demand

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Demand is log-linear if the logarithm of demand is a linear function of the logarithms of prices, income, and other variables.

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Indifference Curves

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A curve that defines the combination of two goods that give a consumer the same level of satisfaction.

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Marginal Rate of Substitution (MRS)

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The rate at which a consumer is willing to substitute one good for another and still maintain the same level of satisfaction.

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Income Elasticity

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A measure of the responsiveness of the demand for a good to the changes in consumer income: the % change in quantity demanded divided by the % change in income.

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Market Rate of Substitution

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The rate at which one good may be traded for another in the market; slope of budget line (-Px/Py)

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Substitution Effect

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The movement along a given indifference curve that results from a change in the relative prices of goods, holding real income constant.

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Income Effect

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The movement from one indifference curve to another that results from the change in real income caused by a price change.

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Consumer Equilibrium

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The equilibrium consumption bundle is the affordable bundle that yield the greatest satisfaction to the consumer.

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Total Product

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The maximum level of output produces with a given amount of input.

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Value Marginal Product

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The value of the output produced by the last unit of an input.

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Linear Production Function

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A production function that assumes a perfect linear relationship between all inputs and total outputs.
aK+bL : where a is cost of Capital and b is cost of Labour.

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(% CHANGE OF Qx)/(% CHANGE OF Px)

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Own-Price Elasticity (which is always negative)

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Leontief Production Function

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A production function that assumes that inputs are used in fixed proportions.

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Cobb-Douglas Production Function

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A production function that assumes some degree of substitutability among inputs.

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Isoquant

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The locus of all combinations of inputs that guarantees a given level of output.

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Marginal Rate of Technical Substitution (MRTS)

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The rate at which a producer can substitute between two inputs and maintain the same level of output.

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|(MPL)/(MPK)|

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= Marginal Rate of Technical Substitution

MRTS = |(MPL)/(MPK)|

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Law of Diminishing Marginal Rate of Technical Substitution

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A property of a production function stating that as less of one input is used, increasing amounts of another input must be employed to produce the same level of output.

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Isocost

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The combinations of inputs that will cost the producer the same amount of money.
rK + wL = C
K = (C/r) - (w/r)*L

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Sunk Costs

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A cost that is forever lost after is has been paid.

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Economies of Scale

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When long-run average costs decline as output is increased.

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Diseconomies of Scale

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Exists when long-run average costs rise as output is increased.

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Constant Returns to Scale

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Exists when long-run average costs remain constant as output is increased.

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Economies of Scope

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When the total cost of producing two types of outputs together is less than the total cost of producing each type of output separately.

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Cost Complementarity

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When the marginal cost of producing one type of output decreases when the output of another good is increased.

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Perfectly Competitive Market

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A market structure with many buyers and sellers, homogeneous product, perfect information, no transaction costs, free entry and exit.

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Monopoly

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A market structure in which a single firm serves an entire market for a good that has no close substitutes.

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Comparative Advertising

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A form of advertising where a firm attempts to increase its brand identity by differentiating its product.

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Brand Equity

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The additional value added to a product because of its brand.

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Niche Marketing

Back 57

A marketing strategy where goods and services are tailored to meet the needs of a particular segment of the market.

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Green Marketing

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A form of niche marketing where firms target products toward consumers who are concerned about environmental issues.

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Oligopoly

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A market structure, in which there are only a few firms, each of which is large relative to the total industry.

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Cournot Model

Back 60

- A few firms produce goods that are either homogeneous (perfect substitutes) or differentiated ( imperfect substitutes)
- Firms set output to maximise profit
- Interaction is for one period
- Each firm believes their rivals will hold their output constant if it changes
its own output (rivals’ output is viewed as given or “fixed”)
- Barriers to entry exist

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Stackelberg Oligopoly

Back 61

1. There are few firms serving
many customers
2. Firms produce either
homogeneous or differential
products
3. A single firm (market leader)
chooses an output before all other
firms choose their output
4. All the followers take the given
output of the leader and choose
outputs to max profits
5. Barriers to entry exist

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Bertrand Model

Back 62

1. There are few firms serving many customers
2. Firms produce either homogeneous or differential products
3. Firms engage in price competition and react optimally to prices charged by
the competitors
4. Consumers have perfect information and there are no transaction costs
5. Barriers to entry exist

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Price discrimination

Back 63

The practice of charging different prices to consumers for the same good or service.

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Two Part Pricing

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A strategy for charging a fixed gee for the right to purchase a product plus a per unit price.

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Block Pricing

Back 65

A strategy where identical products are packed together in order to enhance profits by forcing customers to make all-or-none decisions.

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Commodity Bundling

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The practice of bundling several different products together and selling them at a single price.

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Peak-load Pricing

Back 67

Strategy in which higher prices are charged during peak hours and lower prices in off-peak hours.

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Cross Subsidisation

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When a firm sells two complement goods a firm may enhance profits by selling one of the products at a much lower price (smaller or equal to MC) than the other.

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Price Matching

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A firm advertises a price and promise to match any lower price in the market.

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Randomise Pricing

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Pricing strategy in which firms put different prices day to day to hide price information from customers and rivals

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Simultaneous-Move Game

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A game in which each player makes decisions without knowledge of the other player's move.

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Sequential - Move Game

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Game in which one player makes a move after observing the other player's move.

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Strategy (Game Theory)

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In game theory, a decision rule that describes the actions a player will take at each decision point.

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Normal-Form Game

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A representation of a game indicating the players, their possible strategies and the payoffs resulting from alternative strategies.

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Dominant Strategy

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A strategy that results in the highest payoff to a player regardless of the opponent's action.

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Secure Strategy

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A strategy that guarantees the highest payoff given the worst possible scenario.

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Nash Equilibrium

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A condition describing a set of strategies in which no player can improve their payoff, given the other players' strategies.

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Mixed (Randomised) Strategy

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A strategy whereby a player randomises over two or more available actions in order to keep rivals from being able to predict their reaction.

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Infinitely Repeated Game

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A game that is played over and over again forever and in which players receive payoffs during each play.

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Trigger Strategy

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A strategy that is contingent on the past play of the game, and in which same particular past action triggers a different action by a player.

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Extensive-From Game

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A representation of a game that summarises the players, the information available to them at each stage, the strategies available to them, the sequence of moves, and the payoffs resulting from alternative strategies.

Front 82

Subgame Perfect Equilibrium

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A condition describing a set of strategies that constitutes a Nash Equilibrium and allows no player to improve his own payoff at any stage of the game by changing strategies.

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Reservation Price

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The price at which a consumer is indifferent between purchasing at the given price and searching for a lower price

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Asymmetric Information

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A situation that exists when some people have better information than others.

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Hidden Characteristics

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Things one party to a transaction knows about itself but which are unknown to the other party.

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Hidden Action

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Action taken by one party in a relationship that cannot be observed by the other party.

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Adverse Selection

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Situation where individuals have hidden characteristics and in which a selection process results in a pool of individuals with undesirable characteristics.

Front 88

Moral Hazard

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Situation where one party to a contract takes a hidden action that benefits him or her at the expense of another party.

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Signaling

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An attempt by an informed party to send an observable indicator of his or her hidden characteristics to an uninformed party.

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Screening

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An attempt by an uninformed party to sort individuals according to their characteristics.

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Self-Selection Device

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A mechanism in which informed parties are presented with a set of options, and the options they choose reveal their hidden characteristics.

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English Auction

Back 92

An ascending sequential-bid auction in which bidders observe the bids of others and decide whether or not to increase the bid. The auction ends when a single bidder remains; this bidder obtains the item and pays the auctioneer the amount of the bid.

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First-Price, Sealed-Bid Auction

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A simultaneous-move auction in which bidders simultaneously submit bids. The auctioneer awards the item to the highest bidder, who pays the amount bid by the second highest bidder.

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Dutch Auction

Back 94

A descending sequential-bid auction in which the auctioneer begins with a high asking price and gradually reduces the asking price until one bidder announces the willingness to pay that price for the item.

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Independent Private Values

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Auction environment in which each dibber knows his own valuation of the item but does not know other bidders' valuations, and in which each bidder's valuation does not depend on other bidder's valuations of the object.

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Affiliated (Correlated) value Estimates

Back 96

Auction environment in which bidders do not know their own valuation of the item or the valuation of others. Each bidder uses his of her own information to estimate their valuation, and these value estimates are affiliated. The higher a bidder's value estimate, the more likely it is that other bidders will also have high value estimates.

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Common Value

Back 97

Auction environment in which the true value of the item is the same for all bidders, but this common value is unknown. Bidders each use their own (private) information to form an estimate of the item's true common value.

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Winner's Curse

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The 'bad news' conveyed to the winner that their estimate of the item's value exceeds the estimates of all other bidders.