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ECO Test 3

Definitions

Question	Answer
Monopoly	A one-firm industry with no close product substitutes and with substantial barriers to entry.
Economies of Scale	As the firm expands in size, average total costs decline.
Rent Seeking	Resources expended to protect a monopoly position, such as lobbying, extending patents, and restricting the number of licenses permitted.
X-Inefficiency	This occurs when monopolies are protected from competitive pressures. Spending on corporate jets, travel, and other perks of business represent this.
Price Descrimination	Charging different consumer groups different prices for the same product. The conditions necesary for this are some monopoly power, different consumer groups with different elasticities of demand, and ability of the firm to prevent arbitrage
Natural Monopoly	Large economies of scale mean that the minimum efficient scale of operations is roughly equal to market demand
Marginal Cost Pricing Rule	Regulators would prefer to have natural monopolists price where MR = P, but this would result in long term losses because ATC > MC.
Average Cost Pricing Rule	Requires a regulated monopolist to produce and sell output where price equals average total costs. This permits the regulated monopolist ot earn a normal return on investment over the long term and so remain in business.
Rate of Return Regulation	Permits product pricing that allows the firm to earn a mornal return on capital invested in the firm.
Price Caps	Maximum price at which a regulated firm can sell its product. They are often flexible enough to allow for changing cost conditions.
Antitrust Laws	Laws designed to maintain competition and prevent monopolies from developing.
Concentration Ratios	The share of industry shipments or sales accounted for by the top four or eight firms.
Herfindahl-Hirshman Index (HHI)	A way of measuring industry concentration, equal to the sum of the squares of market shares for all firms in the industry.
Contestable Markets	Markets that look monopolistic but have entry costs so low that the sheer threat of entry keeps prices low.
Network Externalities	Markets in which, as more people use the network, the network becomes more valuable.
Monopolistic Competition	Involves a large number of small firms and is similar to competition, with easy entry and exit, but unlike the competitive model, the firms have differentiated their products, whether real or imagined.
Product Differentiation	One firm's product is distinct from another's through such things as advertising, innovation, and location.
Oligopoly	A market with just a few firms dominating the industry where (1) each firm recognizes that it must consider its competitors reactions when making its own decisions (mutual interdependence), and (2) there are significant barriers to entry into the market.
Mutual Interdependence	When only a few firms constitute an industry, each firm must consider the reactions of its competitors to its decisions.
Cartel	An agreement between firms in an industry (or countries) to formally collude on a price and output, then agree on the distribution of production.
Kinked Demand Curve	An olig model that assumes that if a firm raises its price, competitors will not raise theirs; but if the firm lowers its price, all of its competitors will lower their price to match the reduction. Leads to kink in the demand curve and relatively stable
Game Theory	An approach to analyzing the oligopoly behavior using mathematics and simulation by using different assumptions about the players, time and evolved, level of information, strategies, and other aspects of the game.
Prisoner's Dilemma	A non-cooperative game where players cannot communicate and collaborate in making their decisions about whether to confess or not and thus results in inferior outcomes for both players. Many oligopoly decisions can be framed as this.
Nash Equilibrium	An important proof that an n-person game where each player chooses his optimal strategy, given that all other players have done the same, has a solution. Was an important proof bc economists now knew that even complex models/games had and equil. or sol.
Static Games	One-off games (not repeated) where decisions by the players are made simultaneously and are irreversible.
Dynamic Games	Sequential or repeated games where the players can adjust their actions based on the decisions of other players in the past.
Predatory Pricing	Selling below cost to consumers in the short run hoping to eliminate competitors so that prices can be raised in the longer run to earn economic profits.
Trigger Strategies	Action is taken contingent on your opponent's past decisions. For example, a grim trigger strategy is defined as any unfavorable decision by your opponent that is met by a permanent retaliatory decision forever.
Tit-for-Tat Strategies	Action is taken contingent on your opponent's past decisions. For example, a grim trigger strategy is defined as any unfavorable decision by your opponent that is met by a permanent retaliatory decision forever.
Cooperation	Competitive games permit players to collude on prices, output, or other variables. Non-competitive games prevent player communication and collusion.
Time	In static games, players choose their strategies at the same time. In dynamic games, decision making is sequential (one firm sets a price and another firm responds to this price)
One-Off Game	A game where players only have to consider the payoffs (impacts) of a decision.
Repeated Games	A game in which players can react to other player's past strategies.
Zero or Non-Zero Sum Game	Either each winner is paired with a loser or both players can stand to benefit.
Discrete Strategies	Players choose from only a few choices such as "advertise or don't advertise," "confess or don't confess," enter or not enter the industry," etc.
Continuous Strategies	A firm's decisions are based on various and sometimes random events. They aren't black and whte decisions.
Demand for Labor (Derived Demand)	This is derived from the demand of the firm's product and the productivity of labor.
Supply of Labor	The amount of time an individual is willing to work at various wage rates.
Substitution Effect	Higher wages means that the value of work has increased, and the opportunity costs of leisure are higher, so the word is substituted for leisure.
Income Effect	The higher wages mean you can maintain the same standard of living by working fewer hours. The impact on labor supply is generally negative.
Marginal Physical Product of Labor	The additional output a firm receives from employing an added unit of labor (this = ΔQ ÷ ΔL).
Marginal Revenue Product	The value of another worker to the firm is equal to the marginal physical product of labor (MMPL) times marginal revenue (MR).
Value of the Marginal Product	This is equal to price multiplied by the marginal physical product of labor.
Elasticity of Demand for Labor	Equal to the percentage change in the quantity of labor demanded divided by the percentage change in the wage rate.
Monopsony	A labor market with one employer.
Monopolistic Exploitation of Labor	Whenafirmhasmonopolypowerintheproductmarket,marginalrevenueislessthanpriceandthe firm hires labor up to the point where MRPL = wage. Because MRPL is less than the VMPL, workers are paid less than the value of their marginal product and that this results.
Marginal Factor Cost (MFC)	The added costs associated with hiring one more unit of labor. For competitive firms it is equal to the wage rate; but for a monopolist's, it is higher than the new wage rate because all existing workers must be paid this higher new wage, making MFC > W.
Monopsonistic Exploitation of Labor	Because monopsonists higher less labor than the competitive firms, and workers are paid less than the value of their marginal products, this difference is referred to as ----.
Capital	All manufactured products that are used to produce goods and services.
Present Value	The value of an investment (future stream of income) today. The higher the discount rate, the lower the present value today, and vice versa.
Rate of Return	Uses the present value formula, but subtracts costs, then finds the interest rate (discount rate) at which this investment would break even.
Rent/Economic Rent	The return to land as a factor of production.

Created by: howellme

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