Ap Econ chp 23-25

Price taker

A seller (or buyer) of a product or resource that is unable to affect the price at which a product or resource sells by changing the amount it sell (or buys).

Mutual interdependence

A situation in which a change in price strategy by one firm will affect the sales and profits of another firm. Any firm that makes such a change and can expect the other rivals to react to the change.

Increasing cost industry

An industry in which expansion through the entry of new firms raises the prices firms in the industry must pay for resources and therefore increases their production costs.

Constant cost industry

An industry in which the expansion by the entry of new firms has no effect on the prices firms in the industry must pay for resources and thus no effect on production costs.

Long run supply curve

A curve showing the prices at which a purely competitive industry will make various quantities of the product available in the long run.

Cartel

A formal agreement among firms (or countries) in an industry to set the price of a product and establish the outputs of the individual firms or to divide the market for the product geographically.

Oligopoly

A market structure in which a few firms sell either a standardized or differentiated product, into which entry is difficult, in which the firm has limited control over product price because of mutual interdependence (except when there is collusion among firms) and in which there is typically nonprice competition.

Oligopoly

A market structure in which a few firms sell either a standardized or differentiated product, into which entry is difficult, in which the firm has limited control over product price because of mutual interdependence (except when there is collusion among firms), and in which there is typically nonprice competition.

Pure competition

A market structure in which a very large number of firms sells a standardized product, into which entry is very easy, in which the individual seller has no control over the product price and in which there is no nonprice competition; a market characterized by a very large number of buyers and sellers.

Monopolistic competition

A market structure in which many firms sell a differentiated product, into which entry is relatively easy, in which the firm has some control over it's product price, and in which there is considerable nonprice competition.

Monopolistic competition

A market structure in which many firms sell a differentiated product, into which entry is relatively easy, in which the firm has some control over its product price, and in which there is considerable nonprice competition.

Pure monopoly

A market structure in which one firm sells a unique product, into which entry is blocked, in which the single firm has considerable control over product price, and in which nonprice competition May or may not be found.

Game theory model

A means of analyzing the pricing behavior of oligopolists that uses the theory of strategy associated with games such as chess and bridge.

Herfindahl index

A measure of the concentration and competitiveness of an industry; calculated as the sum of the squared percentage market shares of the individual firms in the industry.

Simultaneous consumption

A products ability to satisfy a large number of consumers at the same time.

Collusion

A situation in which firms act together and in agreement to fix prices, divide a market, or otherwise restrict competition.

Product differentiation

A strategy in which one firm's product is distinguished from competing products by means of it's design, related services, quality, location, or other attributes (except price).

Short run supply curve

A supply curve that shows the quantity of a product a firm in a purely competitive industry will offer to sell at various prices in the short run; the portion of the firms short run marginal cost curve that lies above it's average variable cost curve.

Imperfect competition

All market structures except pure competition; includes monopoly, monopolistic competition, and oligopoly.

Decreasing cost industry

An industry in which expansion through the entry of firms lowers the prices that firms in the industry must pay for resources and therefore decreases their production costs.

Price leadership

An informal method that firms in an oligopoly may employ to set the price of their product: one firm(leader) is the first to announce a change in price, and the other firms(follower) soon announce an identical or similar changes.

Differentiated oligopoly

An oligopoly in which the firms produce a differentiated product.

Homogeneous oligopoly

An oligopoly in which the firms produce a standardized product.

Break-even point

An output at which a firm makes a normal profit but not an economic profit.

Tacit understandings

Any method used by an oligopolist to set prices and outputs that does not involve outright collusion. Ex. Price leadership.

Barriers to entry

Anything that artificially prevents the entry of firms into an industry.

Network effects

Increases in the value of a product to each user, including existing users, as the total number of users rises.

Nonprice competition

Competition based on distinguishing one's product by means of product differentiation and then advertising the distinguished product to consumers.

Excess capacity

Plant resources that are underused when imperfectly competitive firms produce less output than that associated with achieving minimum average total cost.

Kinked demand curve

The demand curve for a noncollusive oligopolist, which is based on the assumption that rivals will match a price decrease and will ignore a price increase.

X inefficiency

The failure to produce any specific output at the lowest average (and total) cost possible.

Total revenue

The number of total dollars received by a firm (or firms) from the sale of a product; equal to the total expenditures for the product produced by the firm (or firms); equal to the quantity sold (demanded) multiplied by the price at which it is sold.

Concentration ratio

The percentage of the total sales of an industry made by the number of largest sellers in the industry.

Fair return price

The price of a product that enables its producer to obtain a normal profit and that is equal to the average total cost of producing it.

Socially optimal price

The price of a product that results in the most efficient allocation of an economy's resources and that is equal to the marginal cost of the product.

MR=MC rule

The principle that a firm will maximize it's profit (or minimize it's losses) by producing the output at which marginal revenue and marginal cost are equal, provided product price is equal to or greater than average variable cost.

Productive efficiency

The production of a good in the least costly way; occurs when production takes place at the output at which average total cost is a minimum and marginal product per dollars worth of input is the same for all inputs.

Price discrimination

The selling of a product to different buyers at different prices when the price differences are not justified by differences in cost.

Strategic behavior

Self interested economic actions that take into account the expected reactions of others.

Price war

Successive and continued decreases in the prices charged by firms in an oligopolistic industry. Each firm lowers its price below rivals' prices, hoping to increase its sales and revenues at its rivals expense.

Rent seeking behavior

The actions by persons, firms, or unions to gain special benefits from government at the taxpayers' or someone else's expense.

Allocative efficiency

The apportionment of resources among firms and industries to obtain the production of the products most wanted by society (consumers); the output of each product at which it's marginal cost and price or marginal benefit are equal.

Marginal revenue

The change in total revenue that results from the sale of 1 additional unit of a firms product; equal to the change in total revenue divided by the change in the quantity of the product sold.

Interindustry competition

The competition for sales between the products of one insist and the products of another industry.

Import competition

The competition that domestic firms encounter from the products and services of foreign producers.

Average revenue

The total revenue from the sale of a product divided by the quantity of the product is sold when all units of the product are sold at the same price.