CAPE Economics Unit 1 Module 2 Vocabulary Flashcards

A collection of 70 vocabulary flashcards covering Market Structure, Market Failure, and Intervention based on CAPE Economics Unit 1 Module 2.

Market Structure

The way in which the market is organized for the distribution of goods and services, including the behavior and performance of firms regarding buyers, sellers, and barriers to entry.

Total Cost (TC)

The cost of producing a particular level of output.

Marginal Cost (MC)

The extra cost a firm incurs from producing an additional unit of a good, defined as $MC = \frac{\Delta TC}{\Delta Q}$.

Average Cost (AC)

The cost per unit of producing a certain level of product, defined as $AC = \frac{TC}{Q}$.

Total Revenue (TR)

The amount of money that a firm earns by selling its goods and/or services during a period of time, defined as $TR = P \times Q$.

Marginal Revenue (MR)

The addition to the total revenue resulting from the sale of one extra unit of a good, defined as $MR = \frac{\Delta TR}{\Delta Q}$.

Average Revenue (AR)

The revenue earned per unit of output, defined as $AR = \frac{TR}{Q}$.

Economic Profit

The excess of total revenue over total cost, also known as abnormal or supernormal profit, defined as $\pi = TR - TC$.

Normal Profit

A situation where total revenue is equal to total cost, resulting in zero profit, defined as $\pi = TR - TC = 0$.

Marginal Cost Pricing

The practice of setting the price of a product to equal the extra cost of producing an extra unit of output ($P = MC$).

Average Cost Pricing

The practice of setting the price of a product to the average cost ($P = AC$).

Perfect Competition

A type of market structure where many firms sell identical products and profits are virtually non-existent due to fierce competition.

Homogeneous Goods

Identical products where no differences exist between the goods sold by different suppliers, characteristic of perfect competition.

Price Taker

A firm that must accept the prevailing market price because it lacks the power to influence it, characteristic of perfect competition.

Monopolistic Competition

A market structure where there are many firms, but each offers a slightly different product.

Differentiated Goods

Products that are slightly different from one another, allowing firms to have some control over price, common in monopolistic competition.

Price Maker

A firm that has some control over the price it charges for its products, characteristic of monopoly and monopolistic competition.

Non-Price Competition

A strategy where one firm tries to distinguish its product from rivals based on attributes like design, workmanship, advertising, or innovation.

Excess Capacity

The situation in monopolistic competition where a firm produces a level of output below its minimum efficient scale.

Minimum Efficient Scale

The level of output at which long-run average cost is at its minimum value.

Oligopoly

A type of market structure where a few large firms dominate the market for a particular product.

Duopoly

A specific type of oligopoly where the market is shared by only two firms.

Collusive Oligopoly

When firms coordinate prices to limit competition and reduce market uncertainties, often acting like a single monopoly.

Cartel

A formal organization of producers that agree to coordinate prices and production, such as OPEC.

Formal Collusion

A planned agreement between participating firms to prevent competition through price fixing or production quotas.

Informal/Tacit Collusion

When firms make agreements or coordinate actions without explicit communication, often to avoid detection by regulators.

Kinked Demand Curve

A model for non-collusive oligopoly showing that demand is elastic for price increases and inelastic for price decreases.

Price Stickiness

The tendency for prices to remain inflexible at a certain level in an oligopolistic market, despite changes in costs.

Monopoly

A type of market structure where a single firm controls the entire output of the industry.

Natural Monopoly

A firm that can provide a product or service at a lower cost than a competitive market due to extensive economies of scale.

Geographic Monopoly

A single business providing products or services to a local area because the customer base is too small for competitors.

Government Monopoly

A monopoly owned and operated by the state or authorized by the government as the sole producer.

Technological Monopoly

A monopoly that exists because a business has legal protection through patents or copyrights on a product.

Price Discrimination

The practice of charging different prices to different consumers for the same good or service where cost differences do not justify the price difference.

First-degree price discrimination

When a monopolist charges each individual buyer the maximum price they are willing to pay, eliminating consumer surplus.

Second-degree price discrimination

The practice of charging different prices per unit for different quantities of the same good, such as quantity discounts.

Third-degree price discrimination

Charging different prices for the same product in different submarkets based on segments like age, sex, or location.

Market Segmentation

Dividing a market into groups based on varying price elasticities of demand to facilitate third-degree price discrimination.

Industrial Concentration

The extent to which production in an industry is concentrated among a small number of firms.

Concentration Ratio ($CR_n$)

A measure of market control of the largest firms in an industry, calculated as $CR_n = S_1 + S_2 + \dots + S_n$.

Herfindahl-Hirschman Index (HHI)

A measure of industry competitiveness calculated by summing the squares of the market shares of all firms: $HHI = S_1^2 + S_2^2 + \dots + S_n^2$.

Economic Efficiency

A state where all goods and factors of production are allocated to their most valuable uses and waste is minimized.

Productive Efficiency

Producing goods at the lowest possible average cost using the least amount of resources.

Technical Efficiency

Occurs when production takes place at the lowest point on the average cost curve.

Allocative Efficiency

When the selling price of a product equals the marginal cost ($P = MC$), ensuring the right amount of a product is produced to satisfy consumer wants.

Pareto Efficiency

A situation where it is impossible to make any one person better off without making someone else worse off.

Market Failure

A situation where the interaction of supply and demand fails to achieve Pareto efficiency, leading to productive or allocative inefficiency.

Public Good

A good that is both non-excludable and non-rival, such as a lighthouse or a public park.

Non-excludable

The characteristic of a good where it is impossible to prevent someone from consuming it once it has been provided.

Non-rival

The characteristic where one person's consumption of a good does not diminish the benefit available to others.

Free-rider Problem

When consumers enjoy the benefits of a public good or service without paying for it, leading to its under-provision.

Private Good

A product that is both excludable and rivalrous, typically produced by privately owned businesses.

Merit Good

A good that provides more benefit to the consumer and society than the consumer realizes, such as education.

Demerit Good

A product that is worse for the individual consumer than they realize, such as alcohol or cigarettes.

Positive Externality

Benefits that arise to third parties from the consumption or production of a commodity.

Negative Externality

Costs imposed on third parties as a consequence of the consumption or production of a commodity.

Social Cost

The total cost to society, which is the sum of private costs and external costs.

Social Benefit

The total benefit to society, which is the sum of private benefits and external benefits.

Private Cost

Any cost that a person or firm pays directly in order to buy or produce goods and services.

Private Benefit

Any benefit that a person or firm gains directly from the consumption or production of goods and services.

External Cost

The cost to third parties resulting from the consumption or production of goods and services.

External Benefit

The benefit gained by third parties from the consumption or production of goods and services.

Deadweight Loss

A loss in economic efficiency that occurs when the socially optimal output level ($MSC = MSB$) is not achieved.

Imperfect Information

A situation where buyers or sellers lack necessary information to make an informed decision about a price or product quality.

Asymmetric Information

A condition where one party in a transaction has more information than the other regarding the price or quality of a product.

Adverse Selection

A type of asymmetric information where one party has more knowledge about product quality than the other before a transaction occurs.

Moral Hazard

When a party changes their behavior or provides misleading information after an agreement is reached because they don't face the consequences of their actions.

Tragedy of the Commons

The wasteful exploitation of a resource with open access because users ignore the effects of their actions on others.

Missing Markets

A market failure where demand exists for a good (especially public goods), but supply is absent in a market economy.

Privatisation

The process of selling state-owned enterprises to the private sector to increase operational efficiency.