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Perfect competition
The most competitive market structure is characterized by many small price-taking firms producing a standardized product in an industry in which there are no barriers to entry or exit
Profit maximizing rule
All firms maximize profit by producing where MR = MC
Breakeven point
The output in perfect competition where ATC is minimized and economic profit is zero
Shutdown point
The output where AVC is minimized. If the price falls below this point, the firm chooses to shut down or produce zero units in the short run
Perfectly competitive long-run equilibrium
Occurs when there is no more incentive for firms to enter or exit. P = MR = MC = ATC and π = 0
Normal profit
Another way of saying that firms are earning zero economic profits or a fair rate of return on invested resources
Constant cost industry
Entry (or exit) of firms does not shift the cost curves of firms in the industry
Increasing cost industry
Entry of new firms shifts the cost curves for all firms upward
Decreasing cost industry
Entry of new firms shifts the cost curves for all firms downward
Monopoly
The least competitive market structure; it is characterized by a single producer, with no close substitutes, barriers to entry, and price-making power
Market power
The ability to set the price above the perfectly competitive level
Natural monopoly
The case where economies of scale are so extensive that it is less costly for one firm to supply the entire range of demand
Monopoly long-run equilibrium
Pm > MR = MC, which is not allocatively efficient and deadweight loss exists. Pm > ATC, which is not productively efficient. πm > 0 so consumer surplus is transferred to the monopolist as profit
Price discrimination
The practice of selling essentially the same good to different groups of consumers at different prices
Perfect price discrimination
The type of price discrimination in which each consumer pays exactly his or her maximum willingness to pay. Consumer surplus is eliminated, yet the allocatively efficient output is produced
Monopolistic competition
A market structure characterized by a few small firms producing a differentiated product with easy entry into the market
Monopolistic competition long-run equilibrium
Pmc > MR = MC and Pmc > minimum ATC, so the outcome is not efficient, but πmc = 0
Excess capacity
The difference between the monopolistic competition output Qmc and the output at minimum ATC. Excess capacity is underused plant and equipment
Oligopoly
A very diverse market structure characterized by a small number of interdependent large firms, producing a standardized or differentiated product in a market with a barrier to entry
Four-firm concentration ratio
A measure of industry market power. If the combined market share of the four largest firms is above 40 percent, it is a good indicator of oligopoly
Non-collusive oligopoly
Models where firms are competitive rivals seeking to gain at the expense of their rivals
Prisoner’s dilemma
A game where the two rivals achieve a less desirable outcome because they are unable to coordinate their strategies
Dominant strategy
A strategy that is always the best strategy to pursue, regardless of what a rival is doing
Nash equilibrium
The outcome of a game for which each player’s strategy maximizes his or her payoff, given the strategies used by the rival players
Collusive oligopoly
Models where firms agree to mutually improve their situation
Cartel
A group of firms that agree not to compete with each other on the basis of price, production, or other competitive dimensions. Cartel members operate as a monopolist to maximize their joint profits
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