Final Exam Flashcards
a market structure with many firms selling products that are substitutes but different enough that each firm’s demand curve slopes downward; firm entry is relatively easy
monopolistic competition
the difference between a firm’s profit-maximizing quantity and the quantity that minimizes average cost; firms with excess capacity could reduce average cost by increasing quantity
excess capacity
a market structure characterized by so few firms that each behaves interdependently
oligopoly
an oligopoly that sells a commodity, or a product that does not differ across suppliers, such as an ingot of steel or a barrel of oil
undifferentiated oligopoly
an oligopoly that sells products that differ across suppliers, such as automobiles or breakfast cereal
differentiated oligopoly
an agreement among firms to increase economic profit by dividing the market and fixing the price
collusion
a group of firms that agree to coordinate their production and pricing decisions to earn monopoly profit
cartel
a firm whose price is matched by other firms in the market as a form of tacit collusion
price leader
an approach that analyzes oligopolistic behavior as a series of strategic moves and countermoves by rival firms
game theory
a game that shows why players have difficulty cooperating even though they would benefit from cooperation
prisoner’s dilemma
in game theory, the operational plan pursued by a player
strategy
in game theory, a table listing the payoffs that each player can expect from each move based on the actions of the other player
payoff matrix
in game theory, the outcome achieved when each player’s choice does not depend on what the other player does
dominant-strategy equilibrium
a market with only two producers; a special type of oligopoly market structure
duopoly
a situation in which a firm, or a player in game theory, chooses the best strategy given the strategies chosen by others; no participant can improve his or her outcome by changing strategies evan after learning of the strategies selected by other participants
Nash equilibrium
in game theory, a strategy in repeated games when a player in one round of the game mimics the other player’s behavior in the previous round; an optimal strategy for getting the other player to cooperate
tit-for-tat
a type of game in which a Nash equilibrium occurs when each player chooses the same strategy; neither player can do better than matching the other player’s strategy
coordination game
the expansion of a firm into stages of production earlier or later than those in which it specializes, such as a steel maker that also mines iron ore
vertical integration
a firm buys inputs from outside suppliers
outsourcing
area of specialty; the product or phrase of production a firm supplies with greatest efficiency
core competency
the notion that there is a limit to the information that a firm’s manager can comprehend and act on
bounded rationality
average costs decline as a firm make a range of different products rather than specializes in just one product
economies of scope
the plight of the winning bidder who overestimates an asset’s true value
winner’s curse
one side of the market has better information about the product than does the other side
asymmetric information
one side of the market knows more than the other side about product characteristics that are important to the other side
hidden characteristics
those on the informed side of the market self-select in a way that harms those on the uninformed side of the market
adverse selection
one side of an economic relationship can do something that the other side cannot observe
hidden actions
the agent’s objectives differ from those of the principal’s, and one side can pursue hidden actions
principal-agent problem
a person or firm who hires an agent to act on behalf of that person or firm
principal
a person or firm who is supposed to act on behalf of the principal
agent
a situation in which one party, as a result of a contact, has an incentive to alter their behavior in a way that harms the other party to the contract
moral hazard
the idea that offering high wages attracts a more talented labor pool and encourages those hired to perform well so as to keep their jobs
efficiency wage theory
using a proxy measure to communicate information about unobservable characteristics; the signal is more effective if more-productive workers find it easier to send than do less-productive workers
signaling
the process used by employers to select the most qualified workers based on observable characteristics such as a job applicant’s level of education and course grades
screening
an approach that borrows insights from psychology to help explain economic choices
behavioral economics
a good such as ocean fish that is rival in consumption but non payers cannot be excluded easily
open-access good
because a person cannot be easily excluded from consuming a public good, some people may try to reap the benefits of the good without paying for it
free-rider problem
under certain conditions, the preferences of the median, or middle, voter will dominate other preferences of all other voters
median-voter model
a stance adopted by voters when they realize that the cost of understanding and voting on a particular issue exceeds the benefit expected from doing so
rational ignorance
legislation that involves widespread costs and widespread benefits—nearly everyone pays and nearly everyone benefits
traditional public-goods legislation
legislation with concentrated benefits but widespread costs
special-interest legislation
special-interest legislation with narrow geographical benefits but funded by all taxpayers
pork-barrel spending
legislation with widespread benefits but concentrated costs
populist legislation
legislation that confers concentrated benefits on one group by imposing concentrated costs on another group
competing-interest legislation
an expression used to describe market activity that goes unreported either because it is illegal or because those involved want to evade taxes
underground economy
government agencies charged with implementing legislation and financed by appropriations from legislative bodies
bureaus
a resource in fixed supply, such as crude oil or coal
exhaustible resource
a resource that regenerates itself and so can be used indefinitely if used conservatively, such as properly managed forest
renewable resource
unrestricted access to a resource results in overuse
common-pool problem
occurs when the relationship between the output rate and the generation of an externality is fixed; the only way to reduce the externality is to reduced the output
fixed-production technology
the sum of the marginal private cost and the marginal external cost of production or consumption
marginal social cost
occurs when the amount of externality generated at a given rate of output can be reduced by altering the production process
variable technology
the sum of the marginal private benefit and the marginal external benefit of production or consumption
marginal social benefit
as long as bargaining costs are low, an efficient solution to the problem of externalities is achieved by assigning property rights to one party or the other, it doesn’t matter which
Coase theorem
an approach that required polluters to adopt particular technologies to reduce emissions by specific amounts; inflexible regulations based on engineering standards that ignore each firm’s unique ways of reducing pollution
command-and-control environmental regulations
an approach that offers each polluter the flexibility to reduce emissions as cost-effectively as possible, given its unique cost conditions; the market for pollution rights is an example
economic efficiency approach
the process of converting waste products into reusable material
recycling
a curve showing the percentage of total income received by a given percentage of recipients whose incomes are arrayed from smallest to largest
Lorenz curve
the middle income when all incomes are ranked form smallest to largest
median income
the middle wage when wages of all workers are ranked from lowest to highest
median wage
benchmark level of income computed by the federal government to track poverty over time; initially based on three times the cost of a nutritionally adequate diet
U.S. official poverty level
government programs designed to help make up for lost income of people who worked buy are now retired, unemployed, or unable to work because of disability or work-related injury
social insurance
social insurance program providing health insurance for short-term medical care to older Americans, regardless of income
Medicare
welfare programs that provide money and in-kind assistance to the poor; benefits do not depend on prior contributions
income assistance programs
a program in which, to be eligible, an individual’s income and assists must not exceed specified levels
means-tested program
an income assistance program funded largely by the federal government but run by the states to provide cash transfer payments to poor families with dependent children
Temporary Assistance for Needy Families (TANF)
an income assistance program the provides cash transfers to the elderly poor and the disable; a uniform federal payment is supplemented by transfers that vary access states
Supplemental Security Income (SSI)
a federal program that supplements the wages of the working poor
earned-income tax credit
an in-kind transfer program that provides medical care for poor people; by far the most costly welfare program
Medicaid
an in-kind transfer program that offers low-income households vouchers redeemable for food; benefit levels vary inversely with household income
SNAP
supplements retired income to those with a record of contributing to the program during their working years; by far the largest government redistribution program
Social Security
