EC 201 Midterm 3
best response
the choice that yields the highest payoff given the other player's choice
extrinsic motivation
the desire to do something for its external rewards such as higher pay
intrinsic motivation
the desire to do something for the enjoyment of the activity itself
compensating differential
the differences in wages required to offset the desirable or undesirable aspects of a job
market power
the extent to which a seller can charge a higher price without losing many sales to competing businesses
intergenerational mobility
the extent to which the economic status of children is independent of the economic status of their parents
short run
the horizon over which the production capacity, and the number and type of competitors you face, cannot change
long run
the horizon over which you, or your rivals, may expand or contract production capacity, and new rivals may enter the market or existing firms may exit
income
the money you receive in a period of time, such as a year
poverty rate
the percentage of people whose family income is below the poverty line
utilitarianism
the political philosophy that government should try to maximize total utility in society
discount effect
the price cut you'll have to offer x the quantity that gets that price cut
output effect
the price of the extra item you sell
second-mover advantage
the strategic advantage that can follow from taking an action that adapts to your rival's choice
first-mover advantage
the strategic gain from an anticipatory action that can force a rival to respond less aggressively
accounting profit
the total revenue a business receives, less its explicit financial costs accounting profit = total revenue - explicit financial costs
economic profit
the total revenue a firm receives, less both explicit financial costs and entrepreneur's implicit opportunity costs economic profit = total revenue - explicit financial costs - entrepreneur's implicit opportunity costs
discrimination
treating people differently based on characteristics such as their gender, race, ethnicity, sexual orientation, religion, disability, social class or other factors
statistical discrimination
using observations about the average characteristics of a group to make inferences about an individual
coordination game
when all players have a common interest in coordinating their choices
free entry
when there are no factors making it particularly difficult or costly for a business to enter or exit an industry
multiple equilibria
when there is more than one equilibrium
monopoly
when there is only one seller in the market
imperfect competition
when you face at least some competitors and/or you sell products that differ at least a little from your competitors, examples are monopolistic competition and oligopoly
finitely repeated game
when you face the same strategic interaction a fixed number of times
indefinitely repeated game
when you face the same strategic interaction an unknown number of times
repeated game
when you face the same strategic interaction with the same rivals and the same payoffs in successive periods
strategic interactions
when your best choice may depend on what others choose, and their best choice may depend on what you choose
anti-coordination game
when your best response is to take a different, but complementary, action to the other player
rational rule for entry
you should enter a market if you expect to earn a positive economic profit, which occurs when the price exceeds your average cost
permanent income
your average lifetime income
utility
your level of well-being
redistribution is costly because of
1. Administrative costs 2. Higher taxes and benefit reductions, both of which can reduce the centavo to work 3. Tax avoidance, evasion and fraud which all lead to a leaky bucket
market power leads businesses to
1. Charge a higher price 2. Sell a smaller quantity 3. Earn larger profits 4. Survive with inefficiently high costs
3 solutions to coordination problems
1. Communication 2. Focal points, culture and norms 3. Laws and regulations
4 steps for making good strategic decisions
1. Consider all the possible outcomes 2. Think about the "what if" separately 3. Play your best response 4. Put yourself in someone else's shoes
understanding the prisoner's dilemma
1. Consider all the possible outcomes 2. Think about the "what if" separately 3. Play your best response 4. Put yourself in someone else's shoes
4 strategies to outcompete and deter new entrants
1. Demand-side: create customer lock-in 2. Supply-side: develop unique costs advantages 3. Regulatory: mobilize the government to prevent entry 4. Deterrence: convince potential entrants you'll crush them
personnel economics says to
1. Ensure your workers have the right skills for the job 2. Motivate your staff with incentives 3. Shape your corporate culture 4. Offer the right benefits package 5. Attract and retain better workers
wages vary due to differences in
1. Labor demand and human capital 2. Labor supply and compensating differentials 3. Institutional factors 4. Discrimination
5 key insights into imperfect competition
1. Market power allows you to pursue independent pricing strategies 2. More competitors leads to less market power 3. Successful product differentiation gives you more market power 4. Imperfect competition among buyers gives them bargaining power 5. Your best choice depends on the actions that other businesses make
3 types of discrimination
1. Prejudice 2. Implicit bias 3. Statistical discrimination
average revenue
revenue per unit, calculated as total revenue divided by the quantity supplied, average revenue is equal to the price, if you charge everyone the same price
regulatory to prevent markets from entering
shape the rules for entry 1. Win patents 2. Shape regulations 3. Impose compulsory licenses 4. Lobby politicians
game tree
shows how a game plays out over time, with the first move forming the trunk, and then each subsequent choice branching out, so the final leaves show all possible outcomes
job-specific skills
skills that are only useful in a job with one particular employer
general skills
skills useful to many employers
reason backward
start by analyzing the last period of the game, use this to figure what will happen in the second-to-last period, and keep reasoning backward until you can see all the consequences that follow from today's decision
income taxes
taxes collected on all income, regardless of its source
human capital
the accumulated knowledge and skills that make a worker more productive
marginal revenue
the addition to total revenue you get from selling one more unit, marginal revenue = output effect - discount effect
marginal utility
the additional utility you get from one more dollar
effective marginal tax
the amount of each extra dollar you earn that you lose to higher taxes and lower government benefits
social safety net
the cash assistance, goods and services provided by the government to better the lives of those at the bottom of the income distribution
one-shot game
a strategic interaction that occurs only once
payoff table
a table that lists your choices in each row, the other player's choices in each column, and so shows all possible outcomes, listing the payoffs in each cell
regressive tax
a tax where those with less income tend to pay a higher share of their income on the tax
progressive tax
a tax where those with more income tend to pay a higher share of their income in taxes
wealth
all the assets including savings, cars, a home that you currently have
signal
an action taken to credibly convey private information, or information that is hard for someone else to verify
collusion
an agreement to limit competition, typically an agreement by rivals to not compete with each other, but to all charge high prices instead
nash equilibrium
an equilibrium in which the choice that each player makes is a best response to the choices other players are making
switching costs
an impediment that makes it costly for customers to switch to buying from another business
firm's demand curve
an individual firm's demand curve, summarizes the quantity that buyers demand from an individual firm as it changes its prices
deterrence to prevent markets from entering
convince your rivals you'll crush them 1. Build excess capacity 2. Keep cash on hand 3. Build your brand 4. Earn a reputation as a fierce competitor
average cost
cost per unit, calculated as your firm's total costs, including fixed and variable costs, divided by the quantity produced
demand-side to prevent markets from entering
create customer lock-in 1. Add switching costs 2. Earn goodwill and build your reputation 3. Generate network effects
supply-side to prevent markets from entering
develop unique cost advantages 1. Learn by doing 2. Exploit benefits of mass production 3. Invest in research and development 4. Create relationships with suppliers 5. Limit access to key inputs
diminishing marginal utility
each additional dollar yields a smaller boost to your utility, that is less marginal utility, than the previous dollar
product differentiation
efforts by sellers to make their products differ from those of their competitors
means-tested
eligibility is based on income and sometimes wealth
rational rule for exit
exit the market you expect to earn a negative economic profit, which occurs if the price is less than your average costs
social insurance
government provided insurance against bad outcomes such as unemployment, illness, disability or outliving your savings
grim trigger strategy
if the other players have cooperated in all previous rounds, you will cooperate, but if any player has defected in the past, you will defect
check mark method
if you put a check mark next to each player's best response, then an outcome with a check mark from each player is a nash equilibrium
look forward
in games that play out over time, you should look forward to anticipate the likely consequences of your choices
implicit bias
judgements shaped by the unconscious attribution of particular qualities to specific groups
relative poverty
judges poverty relative to the material living standards of your contemporary society
absolute poverty
judges the adequacy of resources relative to an absolute standard of living
rational rule for sellers
keep selling until your marginal revenue equals your marginal cost
pay-for-performance
linking the income your workers earn to measures of their performance, examples include commissions, piece rates, bonuses or promotions
perfect competition
markets in which: 1. All firms in an industry sell an identical good 2. There are many buyers and sellers, each of whom is small relative to the size of the market
barriers to entry
obstacles that make it difficult for new firms to enter a market
profit margin
profits per unit sold profit margin = average revenue - average cost
monopsony power
a business using its bargaining power as a major buyer of labor to pay lower prices, including lower wages
focal point
a cue from outside a game that helps you coordinate on a specific equilibrium
efficiency wage
a higher wage paid to encourage greater worker productivity
poverty line
a income level, below which a family is defined to be in poverty
strategic plan
a list of instructions that describes exactly how to respond in any possible situation
natural monopoly
a market in which it is cheapest for a single business to service the market
monopolistic competition
a market with many small businesses competing, each selling differentiated products
oligopoly
a market with only a handful of large sellers
prune the tree method
a method for solving game trees: start by looking forward to the final period and highlighting out your rival's best responses, then prune the options the rival would never choose, the "dead leaves", off your game tree
prejudice
a preconceived bias against a group that's not based on reason or experience
