Econ Final

Risk spreading

Breaking a big risk into many smaller risks so it can be spread over many people

Perfect price discrimination

Charging each customer their reservation price

Education: human capital vs signaling

College signals that grads have different traits beyond what they've learned in school (Ie. are better able to delay gratification), College human capital shows building writing, quantitative, and reasoning skills → makes a better communicator, problem solver, and strategic thinker

Diversification

Combining a large number of small risks whose outcomes are not closely related

Average cost curve

Cost per unit (Total costs/quantity produced)

Product positioning and analogy of "The Beach"

Demand: Position product next to rival to get the most customers - Supply: Position product away from your rival to reduce price competition

Barriers to entry: supply-side + demand + regulatory + deterrent

Demand: find ways to create customer lock-in - Supply: develop unique cost advantages - Regulatory: mobilize the gov to prevent entry - Deterrence: convince potential entrants you'll crush them

Risk aversion

Disliking uncertainty (Risk averse people won't take fair bets (leaves current wealth but more uncertainty))

Expected values

Expected revenue from a gamble

Intergenerational mobility

Extent to which economic status of children is independent from status of their parents

Forces that erode profits (e.g.

Five Forces Framework) , Competition of existing competitors - Threat of potential entrants - Threat of substitute products - Bargaining power of suppliers - Bargaining power of customers

Effects on incumbent firms of entry and exit of other firms

New competitors make market less profitable - Competitors leave unprofitable markets, which helps restore profitability

Hurdle method

Offer lower prices only to buyers who are willing to overcome some hurdle/obstacle

Hold-up problem and its consequences/ solutions

Once you've made a relationship specific investment you lost bargaining power (other side tries to force you to accept a worse deal, can lead to underinvestment) - solutions: reputation and repeated interaction and vertical integration

The Prisoner's Dilemma

People often fail to cooperate, even when cooperation could be beneficial

Relationship between type of advertising and market structure / type of good

Perfectly competitive market → don't advertise (advertising your product will benefit a lot more sellers than just you) - Monopolies → advertise product - Imperfect competition → advertise more aggressively (steal customers from rivals)

Group pricing

Price discrimination by charging different prices to different groups (segmenting)

Profit margin

Profit per units sold (Av rev - av cost)

Discount effect

Seller must lower price a bit to sell the extra item - Causes marginal revenue curve to decrease faster

Bundling

Selling different goods together as a package

Price discrimination

Selling the same good at different prices to get more revenue and customers

Advertising's purpose

Shifts and deepens your firm demand curve

Price takers

Take market price as given and charge the market price

Superstars: why do some people earn so much

Technology expands reach (streams, albums, etc.) - Winner take all market (Why listen to the 100th best when you can listen to the best)

Human capital

The accumulated knowledge and skills that make a worker more productive

Marginal utility and diminishing marginal utility

The additional utility you get from one more dollar (Diminishing: each additional dollar yields a smaller boost to your utility than the previous dollar)

Compensating differentials

The difference 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

Game theory definition

The study of strategic interactions (An interaction where one's best choice depends on what other people choose)

Inefficiency of advertising?

Wasteful from society's perspective - Another businesses' gains from stealing business are offset by losses of the other business - Businesses advertise because the other does, and it has to compete

Long run equilibrium for a market

When a company makes no profits

When does entry occur?

When there is a positive economic profit

Utility

Your level of well being

Search good

a good you can easily evaluate before buying

Experience good

a good you have to try to evaluate (Pepsi)

Oligopoly

a market with only a handful of large sellers

Prejudice

a preconceived bias against a group that's not based on reason/experience

Non-price competition

competing to have best product (product differentiation) to win over customers

Price competition

competing to have lowest price to win over customers

diminishing marginal utility

each additional dollar yields a smaller boost to your utility than the previous dollar

Official poverty

family income is below the poverty line

Utilitarianism

gov should try to maximize total utility in society

Social insurance

gov. Provided insurance against bad outcomes like unemployment, illness, disability, or outliving your savings

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

Perfect competition

markets in which all firms sell an identical good and there are many and buyers and sellers, each of whom is small relative to the size of the market (no market power)

Informational Ad

provides info about a product and its attributes (Good for search goods )

Regressive tax

tax where those with less income pay a higher share of their income on the tax

Progressive tax

tax where those with more income pay a higher share of their income in taxes

Marginal utility

the additional utility you get from one more dollar

Social safety net

the cash assistance, goods, and services provided by gov. To better lives of those at the bottom of the income distribution

Short run

time period where production capacity and number and type of competitors faced cannot change

Long run

time where new rivals may enter or expand into your market and existing rivals can exit the market

Accounting profit

total revenue a business receives - explicit financial costs

Economic profit

total revenue a firm receives - explicit financial costs and implicit OC of entrepreneur's time and money

Persuasive ad

tries to persuade/manipulate you into believing you'll enjoy a particular product

Statistical discrimination

using observations about the average characteristics of a group to make inferences about an individual

Expected utility

what your utility will be on average if you make a particular choice - Calculation: average of different utility levels associated with each possible outcome by the probability that outcome occurs (Probability business succeeds * utility if business succeeds + probability business fails * utility if business fails)

Monopoly

when there is only one seller in the market

Utility

your level of well-being

The marginal firm

A firm at equilibrium where av. rev = av. cost

Fair bet

A gamble that, on average, will leave you with the same amount of money

Natural monopolies

A market in which it is cheapest for a single business to service the market (gov intervention necessary)

Monopolistic competition

A market with many small businesses competing, each selling differentiated products

Insurance

A promise of compensation if a specified bad thing happens

Bargaining power

Ability to negotiate a better deal (Determined by your next best alternative aka opp. cost principle)

Hedging

Acquire an offsetting risk

The challenges of redistribution (leaky bucket)

Administrative costs subtract from what you can redistribute - When higher income people get a smaller reward for working, they might work less → less money to be redistributed - Reduces incentive to work - Higher taxes → more tax avoidance, evasion, and fraud

Signaling

An action taken to credibly convey private info, or info that is hard for someone else to verify

Collusion

An agreement to limit competition (usually has rivals all charge high prices) (illegal)

Reservation price

Maximum price a customer will pay for a product (equal to marginal benefit)

Institutional factors that affect wages

Minimum wage - unions - monopsony

"The firm demand curve

" aka, the demand curve a firm faces, An individual firm's demand curve (summarizes the quantity that buyers demand from an individual firm as it changes its price)

Output effect

An extra unit of output will boost her revenue by an amount equal to the price of the extra item sold

Switching costs

An impediment that makes it costly for customers to switch to buying from another business

Relationship-specific investment

An investment that is more valuable if the current business relationship continues

Government tools to keep market power in check

Anti-collusion laws - Merger laws prevent competing businesses from combining - Monopolizing a market is illegal; being a monopoly isn't - Price ceiling limits abuse of market power through too high prices

Average revenue curve

Av Rev: revenue per unit (Total revenue/quantity supplied = price) - Equal to demand curve, which shows price you can charge at any given quantity

Permanent income

Average lifetime income

Marginal revenue curve and the rational rule for sellers [How does a firm with market power set the price?]

Marginal revenue curve: the change in total revenue with each additional unit sold - Calculate total revenue (price you charge * quantity you sell) - Calculate marginal revenue (additional revenue you earn from selling each extra car -Plot of marginal revenue curve (lies below firm's demand curve)

Why is market power inefficient?

Market power leads to higher prices - Market power → inefficiently smaller quantity (underproduction) - Yields larger economic benefits -Businesses w market power can survive with inefficiently high costs