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Econ exam #3
economics 221
| Term | Definition |
|---|---|
| General Equilibrium | condition that exists when all markets in an economy are in simultaneous equilibrium |
| Partial Equilibrium | process of examining the equilibrium conditions in individual markets and for households & firms separately (technological changes on cost, firms, & market place) |
| Pareto Optimality | a condition in which no change is possible that will make some members of a society better off without making other members worse off (ex:budget cuts in Mass) |
| market failure | when resources are misallocated or allocated inefficiently. the result is lost value. |
| 4 reasons for market failure | 1.imperfect market structure (non competitive) 2. existence of public goods 3. presence of external costs and benefits 4. imperfect information |
| externality | a cost or benefit imposed on an individual or group that is outside/external to the transaction |
| imperfect markets | with fewer firms competing and limited entry by new firms, prices will not equal marginal costs |
| public goods | (social goods) goods & services that bestow collective benefits on members of a society. Generally noone can be excluded from enjoying their benefits (national defense) |
| monopoly | industry with single firm & entry of new firms is blocked |
| pure monopoly | single firm that there are no substitutes for their products. aka no competition |
| when total revenue reaches its max, Marginal revenue= _____ | 0 |
| barriers to entry | factors that prevent new firms from entering & competing in imperfectly competitive industries |
| patents | a barrier to entry that grants exclusive use of the patented product or process to the inventor |
| natural monopoly | industry that realizes such large economies of scale in producing its product that single firm production of that good or service is most efficient |
| social costs | inefficiency and consumer loss |
| sherman act | every contract in restraint of trade among the several states, or foreign, is now illegal. every person who tries to monopoly is charged |
| Rule of reason | criteria given by supreme court to determine whether a particular action was legal or not with in terms of the sherman act |
| clayton act | passed to strengthen the sherman act and clarify the rule of reason, the act outlawed monopolistic actions like tying contracts, price discrimination, and unlimited mergers |
| oligopoly | market structure with a few dominant firms. Products may be differentiated or homogenous |
| cartels | a group of firms that get together and make joint price and output decisions to maximize joint profits |
| collusion | occurs when price and quantify-fixing agreements among producers are explicit. (tacit:implicit) |
| price leadership | form of oligopoly in which one dominant firm sets prices and all the smaller firms in the industry follow its price policy |
| duopoly | a 2-firm oligopoly |
| game theory | analyzes the choices made by rival firms, people, and even governments when they are trying to maximize their own well-being while anticipating and reacting to the actions of others in their environment |
| HHI (Herfindahl-Hirschman Index) | an index of market concentration found by summing the square of percentage shares of firms in the market |
| the 5 forces | 1. suppliers 2. substitutes 3. buyers 4. potential entrants 5. industry competitors |
| contestable markets | markets in which exit and entry are easy |
| concentration ratio | the share of industry output in sales or employment accounted for by the top firms |
| monopolistic competition | product differentiation and advertising are characteristics. a common form, no barriers to entry, large number of firms |
| product differentiation | a strategy that firms use to achieve market power.accomplished by producing products that have distinct positive identities in customers minds to achieve market power |
| horizontal differentiation | products differ in ways that make them better for some people and worse for others |
| vertical differentiation | products differ, that in everyones perspective, makes a better product than rivals |
| advertising | provides customers with valuable info on product availability, quantity and price |
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