Chapter 12: Competition and the Invisible Hand

Flashcards defining key economic concepts from Chapter 12 on Competition and the Invisible Hand.

Invisible Hand

A metaphor introduced by Adam Smith to describe the self-regulating nature of the marketplace.

Competition

The rivalry among sellers to attract customers while lowering costs.

Market Equilibrium

The point where supply equals demand.

Supply and Demand

Economic model of price determination in a market.

Price Elasticity

Measurement of how much the quantity demanded of a good responds to a change in price.

Marginal Cost

The cost of producing one additional unit of a good.

Consumer Surplus

The difference between what consumers are willing to pay and what they actually pay.

Producer Surplus

The difference between what producers are willing to sell a good for and the market price.

Perfect Competition

A market structure where many firms offer a homogeneous product.

Monopoly

A market structure where a single seller controls the entire market.

Oligopoly

A market structure characterized by a small number of firms that dominate the market.

Barriers to Entry

Obstacles that make it difficult for new competitors to enter a market.

Natural Monopoly

A type of monopoly that occurs due to high fixed or startup costs.

Externalities

Costs or benefits incurred by a third party who did not choose to incur those costs or benefits.

Public Goods

Goods that are non-excludable and non-rivalrous.

Market Failure

A situation in which the allocation of goods and services is not efficient.

Regulation

Government intervention in the market to correct market failures.

Substitutes

Goods that can replace each other in consumption.

Complements

Goods that are consumed together.

Inferior Goods

Goods whose demand decreases as consumer incomes rise.

Normal Goods

Goods whose demand increases as consumer incomes rise.