Micro Unit 4 -Types of competition

Accounting profit

A company's total earnings, includes all explicit costs, not implicit

Allocative efficiency

A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it. P=MC ALSO known as socially optimal

Antitrust laws

Antitrust laws are designed to keep free competition in the marketplace.

Barriers to entry

Conditions that keep new businesses either from entering an industry or succeeding in that industry.

cartel

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

Collusion

A secret agreement between rival firms to alter prices.

Copyright

An exclusive right granted by the federal government allowing the owner to reproduce and sell an artistic or published work.

Deregulation

A policy promoting cutbacks in the amount of Federal regulation in specific areas of economic activity.

Diseconomies of scale

An economic concept referring to a situation in which economies of scale no longer function for a firm. Rather than experiencing continued decreasing costs per increase in output, firms see an increase in marginal cost when output is increased.

Dominant strategy

Regardless of other entity's actions, there alwasy exists a strategy that produces a better outcome than any other strategy.

Economic Profit

Accounting profit (dollars) + opportunity cost (what you gave up).

Economies Of Scale

Factors that cause a producer's average cost per unit to fall as output rises

Explicit cost

Explicit costs represent clear, obvious cash outflows from a business that reduce its bottom-line profitability.

Exit

A long-run choice to leave the market due to economic loss.

Fair returns

the place where a regulated monopoly would still earn normal profits, P=D=ATC

Game theory

An approach to evaluating alternative strategies in situations where the outcome of a particular strategy depends on the strategies used by other individuals.

Implicit cost

Input costs that do not require an outlay of money by the firm (e.g. interest forgone on money used). The opportunity costs associated with a firm's use of resources that it owns.

Market power

the ability of a company to change prices and output like a monopolist

Monopolistic competition

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

Monopoly

a market in which there are many buyers but only one seller

Monopsony (Links to an external site.)

A market similar to a monopoly except that a large buyer not seller controls the market

Nash equilibrium

Any combination of strategies in which each players' strategy is his or her best choice, given the other players' strategies.

Natural monopoly

A market situation where the costs of production are minimized by having a single firm produce the product.

Non-price competition

Focuses on factors other than price such as quality, reputation customer service and business location

Normal Profit

The opportunity cost of the resources supplied by the firm's owners; normal profit= accounting profit - economic profit

Oligopoly

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

Patent

A government apporved document granting an inventor sole rights to an invention

Perfect competition

An industry structure in which there are many firms, each small relative to the industry, producing identical products and in which no firm is large enough to have any control over prices. In perfectly competitive industries, new competitors can freely enter and exit the market.

Price searcher

A seller that has the ability to control to some degree the price of the product it sells

Price Maker

a firm that does not have to consider competitors when setting the prices of its products

Price takers

buyers and sellers must accept the price the market determines

Predatory Pricing

selling a product below cost to drive competitors out of the market

Prisoner's dilemma

A famous model in game theory and all of social science. The dilemma is that individuals, acting in their own self interest, arrive at an outcome that is collectively irrational. If the players were able to work together, they could each be better off. Temptation of a player's highest payoff leads to defection. Communication, trust built through playing the game repeatedly, and contracts are methods of gaining cooperation. Click here for example

Profit Maximization

a method of setting prices that occurs when marginal revenue equals marginal cost

Productive efficiency

A situation in which a good or service is produced at the lowest possible cost

Shut down

A short-run decision to temporarily cease production during a specific period of time due to current market conditions