Economics Key Concepts: Costs, Market Structures, Game Theory, and Behavioral Insights

What do firms do to maximize profits?

They set marginal revenue equal to marginal cost.

What is the difference between fixed costs and variable costs?

Fixed costs remain constant regardless of output, while variable costs change with the level of production.

What distinguishes the short run from the long run in economics?

In the short run, some costs are fixed; in the long run, all costs are variable.

What are explicit costs?

Actual expenditures incurred by a firm.

What are implicit costs?

Opportunity costs associated with a firm's resources, such as the owner's time and investment.

What are economic costs?

The sum of explicit and implicit costs.

What is the shutdown condition for a firm?

A firm should shut down if the price is less than the average variable cost in the short run.

What is perfect competition?

A market structure where many firms offer identical products, leading to productive and allocative efficiency.

What is market power?

The ability of a firm to influence the price of a good or service.

What is the output effect in market power?

The change in total revenue resulting from a change in the quantity sold.

What is the discount effect in market power?

The reduction in revenue from lowering prices for all units sold.

What defines a monopoly?

A market structure where a single seller controls the entire market, often due to barriers to entry.

What is deadweight loss?

The loss of economic efficiency when the equilibrium outcome is not achievable or not achieved.

What is oligopoly?

A market structure characterized by a few firms that have some market power and face barriers to entry.

What is monopolistic competition?

A market structure where many firms sell products that are differentiated from one another.

What is price discrimination?

The practice of charging different prices for the same good or service based on consumer segments.

What is market segmentation?

The process of dividing a market into distinct groups of buyers with different needs or behaviors.

What is asymmetric information?

A situation where one party in a transaction has more or better information than the other party.

What is adverse selection?

A situation where buyers or sellers have information that the other party does not, leading to market inefficiencies.

What is a death spiral in the context of adverse selection?

A situation where the market becomes dominated by low-quality goods due to buyers offering lower prices to mitigate risk.

What is the market for health insurance characterized by?

People with high medical bill expectations are more likely to purchase insurance, leading to higher prices and driving healthy individuals out of the market.

What is moral hazard?

It occurs after a transaction when agents do not bear the full cost of their actions, often seen in health insurance markets.

What is the principal-agent problem?

It arises when a principal hires an agent to perform a task, but their incentives are not aligned.

How do online ratings help solve asymmetric information problems?

They provide consumers with valuable information about the quality of products or services.

What is a warranty in the context of signaling?

A warranty is a costly signal that helps consumers gain more information to make informed choices.

What does the term 'cheap talk' refer to?

It refers to communication that lacks credibility or is not backed by costly signals.

How can brand names serve consumers?

Brand names provide assurance of quality and dependability, helping consumers make informed choices.

What is the Nash equilibrium?

It is a situation in a game where no player has an incentive to change their strategy, given the strategies of others.

What are simultaneous and sequential games?

Simultaneous games involve players making decisions at the same time, while sequential games involve players making decisions one after another.

What is the prisoner's dilemma?

A standard example in game theory illustrating how two individuals might not cooperate even if it appears that it is in their best interest.

What does behavioral economics study?

It relaxes standard assumptions of rationality to understand how psychological factors influence economic decision-making.

What is loss aversion?

It is the concept that losses relative to a reference point hurt more than equivalent gains feel good.

What is anchoring in retail?

It is a tactic where consumers focus on a reference price to perceive a deal as more attractive.

What does present bias refer to?

It is the tendency to focus too much on immediate rewards rather than long-term benefits.

What are sunk costs?

Costs that have already been incurred and cannot be recovered; they should not influence future decisions.

What should you consider when making decisions based on sunk costs?

Make decisions on the margin, evaluating whether the next move is worth doing, regardless of past costs.

What is the importance of understanding economic concepts?

Understanding these concepts helps avoid bad decisions, misinformation, and poor policies.

What is the role of human capital in signaling quality?

Attending a reputable university can signal quality and dependability to potential employers.

What is entry deterrence in game theory?

Strategies used by existing firms to prevent new competitors from entering the market.

What is the significance of social norms in repeated games?

Social norms can influence player behavior and strategies over multiple interactions.

How does trust affect strategic behavior in economics?

Trust can facilitate cooperation and improve outcomes in strategic interactions.

What is the relationship between communication and game theory?

Effective communication can alter strategies and outcomes in strategic games.