Key Notes Flashcards
Dominant strategy
A strategy that is best for a firm, no matter what other firms use
Nash equilibrium
A situation where each firm chooses the best strategy, given the strategies chosen by other firms
What is important in determining the extent of competition in an industry?
The minimum efficient scale of production relative to market demand
The prisoner’s dilemma illustrates…
Why firms will not cooperate if they behave strategically
Oligopoly
Markets with only a few sellers
Because of the few sellers, the key feature of oligopoly is the tension between cooperation and self-interest.
Characteristics of an oligopoly market
Few sellers offering similar or identical products.
Interdependent firms.
Barriers to entry (economies of scale)
Economies of scale
Economies of scale exist when a firm’s long-run average costs fall as it increases output.
Game theory
Is the study of how people behave in strategic situations.
Strategic decisions are those in which each person, in deciding what actions to take, must consider how others might respond to that action.
Cooperative equilibrium
An equilibrium in a game in which players cooperate to increase their mutual payoff.
Non-cooperative Equilibrium
An equilibrium in a game in which players do not cooperate but pursue their own self-interest.
Dominant strategy
A strategy that is the best for a firm, no matter what strategies other firms use.
Prisoner’s dilemma
A game where pursuing dominant strategies results in non-cooperation that leaves everyone worse off.
Nash equilibrium
A situation where each firm chooses the best strategy, given the strategies chosen by other firms.
Marginal cost
Change in the firm’s total cost from producing one more unit of a good or service
Change in total cost/change in quantity
Marginal product of labour
The additional output a firm produces as a result of hiring one more worker
Change in quantity/change in labour
Law of diminishing returns
The principle that, at some point, adding more of a variable input, such as labour, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline
CPI (calculating GDP)
CPI = (expenditure in current year/expenditure in base year) x 100
Expenditure is quantity x value or whatever
When Aggregate demand moves
Short run aggregate supply must do the heavy lifting
Unemployment rate
Unemployment rate = number of unemployed/labour force x100
Average revenue (AR)
Total revenue divided by the number of units sold
Marginal revenue (MR)
Change in total revenue from selling one more unit
