Exam 3: Ch7, Ch8, Ch9, Ch10

market structure

a classification system for the key traits of a market including the number of buyers and sellers, the type of product bought and sold, and the ease of entry or exit into and from the market

market power

the ability of a buyer or seller to manipulate the terms of trade, usually price, to their advantage
ability of an agent to influence the terms of trade to their advantage

rent-seeking behavior

the nonproductive use of resources by buyers or sellers with market power to preserve that market power
the pursuit of profitable market opportunities through socially unproductive or wasteful means

price taker

a person whose decision to buy or sell does not affect the price

perceived demand

demand as seen by the seller

identical product

buyers do not differentiate between the product of sellers

rival product

consumption by one prevents consumption by another

excludable product

the seller had sole control over the good until transferred to the buyer

total revenue

price times quantity sold, P*Q

average revenue

total revenue per period divided by output: AR = TR/q

marginal revenue

the change in total revenue divided by the change in output, MR = ?TR/?q. When the change is infinitesimally small, MR = dTR/dq

break-even price

the price at which total revenue equals total cost, or equivalently average revenue equals average total cost

shut-down price

the price below which losses are minimized by shutting down operations. it is equal to the minimum AVC

short-run market supply

the horizontal summations of all firm's supply curves

constant-cost industry

an industry whose long-run supply curve is horizontal

increasing-cost industry

an industry whose long-run supply curve is positively sloped

decreasing-cost industry

an industry whose long-run supply curve is negatively sloped

long-run market supply

a curve showing the relationship between price and the output that all sellers, existing and potential, will supply after all long-run adjustments are made. profits are zero along the LRS

social surplus

equals the sum of consumer and producer surplus when prices are accurate measures of social value

zero profit

profit in an economic sense is zero. revenues are equal to opportunity costs

deadweight loss

a loss not captured by someone else

market failure

a situation in which unrestricted operation of a free market yields a result that is not the socially optimal outcome

negative externality

a cost imposed on "third parties" not reflected in the market system

marginal private benefit

the benefit to a consumer of consuming another unit of a good

marginal social benefit

the benefit to society for having another unit of a good

marginal private cost

the cost to a seller from producing and selling another unit of a good

marginal social cost

the cost to society of producing another unit of a good

positive externality

a benefit imposed on "third parties" not reflected in the market

Pigouvian tax (subsidy)

a per unit charge (rebate) imposed on a good whose production or consumption generates a negative (positive) externality, such that the charge (rebate) equals the MEC (MEB) at the efficient output level

Coase theorem

assignment of property rights, regardless of to whom the rights are assigned, will in the presence of costless bargaining, lead to an efficient allocation of resources even in the presence of externalities

command and control

policies designed to internalize externalities directly through the use of rules or standards

pure public good

a good that possesses a high degree of nonrivalry and nonexcludability


a nonexcludable good is one such that a person can not be denied its benefits once it is provided


a nonrivalrous good is once such that an additional person can benefit from its use without reducing the benefit to others using the good

quasi-public good

a good that possesses a high degree of nonrivalry or nonexcludability

vertical summation

the process of determining the collective demand for a nonrivalrous good by summation of persons' marginal willingness to pay for successive units of the good

free rider

a person that enjoys the benefits of a good provided by others without contributing to the cost of the good

common property resource

resources not controlled by a single agent or group. they are characterized by open access

information asymmetry

occurs when information about a good varies in relevant ways between buyers and sellers

adverse selection

a market inefficiency resulting from information asymmetry. the terms of a transaction are such that one party has characteristics adverse, but unknown to the other party. the market tends to self-select those with these adverse characteristics

moral hazard

a market inefficiency resulting from information asymmetry. the terms of a transaction leads to subsequent behavior less attractive than would occur without the transaction


a firm that is the only producer of a good or service for which there are no good substitutes

natural monopoly

a market structure in which the minimum of the LRAC is beyond the entire range of production that is relevant to its market

barriers to entry

market conditions that prevent the entry of new firms into an industry

average cost (fair-rate-of-return pricing)

regulated pricing so total revenue equals total cost. since economic cost is opportunity cost, this is often referred to as fair-rate-of-return regulation

deadweight loss triangle

measures the loss of society of social surplus that results from firm's having monopoly power

price discrimination

charging different customers different prices that are not related to difference in cost

first degree (perfect) price discrimination

occurs when the seller charges a different price for each unit of output and the price is always the maximum price consumer will pay

third degree price discrimination

occurs when a seller is able to partition market demand into two or more groups and charges different prices to the different groups


a market where there exists a single buyer of a good, service, or productive input

monopolistic competition

a market structure where large numbers of small firms produce a similar, yet not identical, product


a market structure in which a small number of large interdependent firms dominate an industry

excess capacity

exists when the profit-maximizing level of output is less than the output associated with the minimum of long-run average cost


the principle that economic decisions among oligopoly firms are interrelated such that the consequences of one firm's economic decisions spread to the other firms

price leadership model

a model of imperfect oligopoly collusion in which oligopolists set prices as established by some dominant industry firm

cournot model

a model of oligopoly where each firm chooses its output taking its rival's output as given


an oligopoly industry with exactly two firms

kinked demand curve model

a model which attempts to explain price rigidity in oligopoly markets by the premise that oligopolists match price decreases but not increases

cartel model

an oligopoly model showing firms engaged in overt collusion

prisoner's dilemma

a 2-by-2 game where pursuit of self-interest leads to an equilibrium contrary to the interests of the participants