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70 Cards in this Set
- Front
- Back
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Price discrimination
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practice of charging different prices to different consumers for similar goods
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Reservation price
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maximum price that a customer is willing to pay for a good
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1st degree price discrimination
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price matching with the reservation price (no consumer surplus, pareto efficient)
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2nd degree price discrimination
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charging different prices for different QUANTITIES
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Quantity discounts, block pricing
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types of 2nd degree price discrimination
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3rd degree price discrimination
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charging different prices for different DEMAND CURVES
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Monopolistic competition
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market in which firms can enter freely, each producing its own brand of a differentiated product
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Oligopoly
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market wherein only a few firms compete with one another and high entry barriers
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Differentiated products, free entry and exit
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characteristics of monopolistic competition
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Oligopoly
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Market wherein products may or may not be differentiated but only a few firms account for most of total production
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Nash equilibrium
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makes best decision considering the best decision of the other firm
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Cournot Model
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simultaneous decisions
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Stackelberg Model
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Firm 1 first then Firm 2 (sets OUTPUT)
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Bertrand Model
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Firm 1 first then Firm 2 (sets PRICE)
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Non-cooperative game
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game in which negotiations are not possible
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Pay-off Matrix
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table showing profit (payoff) to each firm given its decisions
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Asymmetric Information
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situation in which a buyer and a seller possess different information
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Lemon problem
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drives high-quality products out of the market, decreases price of low-quality over a period of time
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Adverse selection
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form of market failure resulting when products of different qualities are sold at a single price (lemon problem)
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Market signaling
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process which sellers send signals to buyers conveying information about product quality
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Moral hazard
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when a party whose actions are unobserved can affect the probability or magnitude of a payment associated with an event
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Principal-agent problem
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problem arising when agents pursue their own goals rather than the goals of principals
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Agent
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individual employed by a principal to achieve the principal's objective
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Principal
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individual who employs one or more agents to achieve an objective
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Efficiency wage theory
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explanation for the presence of unemployment and wage discrimination which recognizes that LABOR PRODUCTIVITY may be affected by the WAGE RATE
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Shirking model
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principles that workers still have an incentive to shirk if the firm pays them market-clearing wage because fired workers get the same rate elsewhere
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Efficiency wage
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wage that a firm will pay to an employee as an incentive not to shirk
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Price-Wage Spiral
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price and wage relationship and keeps increasing
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Externalities
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action by either producer or consumer which affects other producers or consumers, NOT accounted in market price
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Marginal external cost
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increase in cost imposed externally as one or more firms increase output by one unit
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Marginal social cost
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sum of marginal external cost and production cost
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Marginal external benefit
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additional benefit to the other party
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Marginal social benefit
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sum of marginal external benefit and private benefit
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Tax
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solution for negative externality
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Subsidies and patent law
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solutions for positive externality
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Coarse Theorem
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principle that if parties can come with a mutual solution without any cost, better
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Private good, public good, common resource, natural resource
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types of goods
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Excludability and rivalry in consumption
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characteristics of good
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Excludability
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property of the good prevents others from owning it
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Rivalry in consumption
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consumption of the good with lessen others consumption
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Private good
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excludable and rival in consumption
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Public good
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non excludable nor rival in consumption
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Natural Resource
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excludable but not rival in consumption
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Common Resource
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non excludable but rival in consumption
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Free rider
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consumers or producers who do not pay for a non-exclusive good on the expectations that others will
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Welfare Effect
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Gains and losses to consumers and producers from a government policy and how much
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+A-B
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change in consumer surplus on a price ceiling
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-A-C
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chance in producer surplus on a price ceiling
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Triangle B is larger than rectangle A (net loss for consumers)
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what happens when a price ceiling is implemented but demand is inelastic
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Deadweight loss
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net loss of total (consumers plus producers)
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Quantity distortion
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causes deadweight loss
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-B-C
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total deadweight loss on a price ceiling
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(1/2) base x height
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area of a triangle
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Economic efficiency
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maximization of aggregate consumer and producer surplus
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Market failure
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situation in which an unregulated competitive market is inefficient because price fail to provide proper signals to consumers and producers
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Externalities and lack of information
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Causes of Market Failure
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+A-C
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change in producer surplus on a price floor
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-A-B
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change in consumer surplus on a price floor
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-B-C
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total deadweight loss on a price floor
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-A-B
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change in consumer surplus in price support
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+A+B+D
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change in producer surplus in price support
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Ps(Q2-Q1)
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government cost in price support
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D-Pnew(Q2-Q1)
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total welfare effect in price support
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-A-B
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change in consumer surplus in production quota
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+A+B+D
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change in producer surplus in production quota
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At least B+C+D
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cost to the government for incentives
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-B-C
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total change in welfare in price support/production quota
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Price support
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price set by the government above free-market level and maintained by governmental purchases of excess supply
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Price support and production quota
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ways on how the government set the price above equilibrium price
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Production quota
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reducing supply to set price above free-market level but government pays incentives to loss profits
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