AP Microeconomics Unit 4

Imperfect Competition

the situation prevailing in a market in which elements of monopoly allow individual producers or consumers to exercise some control over market prices (they are inefficient)

Product Market

the market in which households purchase the goods and services that firms produce

Factor Market

market in which firms purchase the factors of production from households

Monopoly

A market structure characterized by a single seller, selling a unique product in the market

Oligopoly

A market structure in which a few large firms dominate a market

Monopolistic Competition

a market structure in which many companies sell products that are similar but not identical

Concentration Ratio

the percentage of the market's total output supplied by its four largest firms

Natural Monopoly

a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms

Socially Optimal Pricing

government will force a monopoly to have allocatively efficient pricing at P = MC

Fair-Return Pricing

Regulator set the price at P=ATC wishing to let the monopoly break even and earn a normal profit

Barriers to Entry

business practices or conditions that make it difficult for new firms to enter the market

Price discrimination

the business practice of selling the same good at different prices to different customers

price elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price

Perfect Price Discrimination

Occurs when a firm charges the maximum amount that buyers are willing to pay for each unit.

Consumer Surplus

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

Non-Price Competition

a way to attract customers through style, service, or location, but not a lower price

Price War

a series of competitive price cuts that lowers the market price below the cost of production

Product Differentiation

a positioning strategy that some firms use to distinguish their products from those of competitors

Excess Capacity

a condition that occurs when demand for a product is less than the amount of product that a business could potentially supply to the market

Duopoly

an oligopoly consisting of only two firms

Collusion

a non-competitive, secret, and sometimes illegal agreement between rivals which attempts to disrupt the market's equilibrium

Cartel

a formal organization of producers that agree to coordinate prices and production

Game Theory

the study of how people behave in strategic situations

Dominant Strategy

a strategy that is best for a player in a game regardless of the strategies chosen by the other players

Prisoner's Dilemma

a particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial

Nash Equilibrium

a situation which where nothing is gained if any of the players change their strategy while all of the other players maintain their strategy