Managerial Economics – Exam 2 – Flashcards
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Contract
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a formal relationship between a buyer and a seller that obligates the buyer and seller to exchange at terms specified in a legal document
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Vertical Integration
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a situation where a firm produces the inputs required to make its final product
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Transaction Costs
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costs associated with acquiring input that are in excess of the amount paid to the input supplier
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Specialized Investment
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an expenditure that must be made to allow two parties to exchange, but has little or no value in any alternative use
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Relationship-Specific Exchange
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a type of exchange that occurs when the parties to a transaction have made specialized investments
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Perfectly Competitive Market
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1. Many Buyers and Sellers 2. Each firm produces a homogenous product 3. Buyers and Sellers have Perfect Information 4. There are no transaction costs 5. There is free entry & exit -- No Firm Can influence the Price of the Product -- Firms earn ZERO ECONOMIC PROFIT -- Price is determined by the intersection of the supply and demand curves
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Firm Demand Curve
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the demand curve for a firm's individual product; in a perfectly competitive market, it is simply the market price
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Marginal Revenue
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the change in revenue attributable to the last unit of output; for a competitive firm, MR is the market price
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Profits of a Perfectly Competitive Firm
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Profits = PQ - C(Q)
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Monopoly
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a market structure in which a single firm serves an entire market for a good that has no close substitutes
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Economies of Scale
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exist when long-run average costs decline as output increases
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Diseconomies of Scale
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exist when long-run average costs increase as output increases
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Economies of Scope
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exist when the total cost of producing two products within the same firm is lower than when the products are produced by separate firms
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Cost Complementaries
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exist when marginal cost of producing one output is reduced when the output of another product is increased
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Deadweight Loss of Monopoly
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the consumer and producer surplus is lost due to the monopolist charging a price in excess of marginal cost
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Monopolistically Competitive Market
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1. There are MANY buyers and sellers 2. Each firm produces a differentiated product 3. There is FREE entry & exit -- Products are close, but not perfect substitutes
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Price Discrimination
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the practice of charging different prices to consumers for the same good or service
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First-Degree Price Discrimination
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charging each consumer the maximum price he or she would be willing to pay for each unit of the good purchased
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Second-Degree Price Discrimination
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the practice of posting a discrete schedule of declining prices for different ranges of quantities
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Third-Degree Price Discrimination
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charging different groups of consumers different prices for the same product
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Two-Part Pricing
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a pricing strategy in which consumers are charges a fixed fee for the right to purchase a product, plus a per-unit charge for each unit purchased (ie. Costco) Entry Fee = Full Amount of Surplus @ 1st degree pricing structure Per Unit Fee = Marginal Cost
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Peak-Load Pricing
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a pricing strategy in which higher prices are charged during peak hours than during off-peak hours
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Oligopoly
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a market structure in which there are only a few firms, each of which is large relative to the total industry
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Duopoly
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an oligopoly composed of only two firms
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Cournot Oligopoly
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1. There are FEW firms serving MANY customers 2. Firms produce differentiated OR homogenous products 3. Each firm believes rivals will HOLD their output constant if the firm changes its output 4. Barriers to ENTRY exist -- Managers make output decisions and believe that their decisions do NOT affect the output decisions of rival firms -- Regardless of homogenous or differentiated products, industry output is lower than the socially efficient level due to the equilibrium price EXCEEDING marginal cost
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Best-Response Function
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a function that defines the profit-maximizing level of output for a firm
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Cournot Equilibrium
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a situation in which neither firm has an incentive to change its output given the other firms output
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Bertrand Oligopoly
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1. There are FEW firms serving MANY customers 2. Firms produce IDENTICAL products at a CONSTANT marginal cost 3. Firms compete in PRICE and react optimally to competitors' prices 4. Consumers have PERFECT information 5. There are NO transactional costs 6. Barriers to ENTRY exist -- From the viewpoint of the firm manager - Bertrand Oligopoly is undesirable and leads to ZERO economic profits, even if there are only 2 firms in the market
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Simultaneous-Move Game
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game in which each player makes decisions without knowledge of the other players' decisions
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Sequential-Move Game
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game in which one player makes a move after observing the other player's move
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Normal-Form Game
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a representation of a game indicating the players, their possible strategies, and the payoffs resulting from alternative strategies
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Dominant Strategy
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a strategy that results in the highest payoff to a player regardless of the opponent's action
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Iteratively Dominant Strategy
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a strategy that is dominant once you eliminate dominated strategies for other players
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Dominated Strategy
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a strategy that is always worse then another strategy for any specific action of other players
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Nash Equilibrium
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a condition describing a set of strategies in which no player can improve his/her payoff by unilaterally changing his/her own strategy, given the other players' strategies
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Aggregate Payoff
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The total payoff per "block" for all players combined
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Infinitely-Repeated Game
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a game that is played over and over again forever and in which players receive payoffs during each play of the game ** If (Net Gain)(Int. Rate) > Future net loss per period ... then CHEAT **
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Net Present Value of Future Cash Flow
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Amount / interest rate
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Trigger Strategy
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a strategy that is contingent on the past play of a game and in which some particular past action "triggers" a different action by a player ** Only for FINITE games with a KNOWN ending **
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Extensive-Form Game
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a representation of a game that summarizes the players, the information available to them at each stage, the strategies available to them, the sequence o moves and the payoffs resulting from alternative strategies
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Marginal Revenue (Perfect Competition)
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MR = P = MC
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Marginal Cost (Perfect Competition)
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MC = P = MR
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Marginal Revenue (Monopoly)
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MR = P (1+E/E)
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Demand Curve (Monopoly)
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P(Q) - a + bQ
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Marginal Revenue Curve (Monopoly)
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MR = a + 2bQ
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Price (Monopoly)
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P = MC (|E|/|E|-1)
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Demand Curve (Cournot Oligopoly)
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P = a - b(q1 + q2)
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Total Revenue (Cournot Oligopoly)
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TR = [a - b(q1 + q2)]q1
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Marginal Revenue (Cournot Oligopoly)
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MR = a - 2bq1 - bq2
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Marginal Cost (Cournot Oligopoly
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MC = c
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Best Response Function
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(a - c / 2b) - (q2 /2) = q1
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