Absolute advantage. when country a¬†can produce a¬†good cheaper than another.
Accounting cost. actual expenses + depreciation for¬†capital equipment.
Actual return. return that an¬†asset earns.
Actuarially fair. situation where an¬†insurance payment = the¬†expected payout.
Adverse selection. market failure, where companies sell products of¬†different qualities at¬†a¬†single price due to¬†asymmetric information.
Advertising elasticity of¬†demand. % change in¬†quantity demanded resulting from 1% increase of¬†advertising expenditures.
Advertising-to-sale ratio. advertising expenditures/ sales
Agent. the¬†Individual employed by¬†a¬†principal (director) to¬†achieve the¬†principal‚Äôs objective.
Amortization. Policy of¬†treating a¬†one-time expenditure as¬†an¬†annual cost spread out over some years.
Anchoring (—Ź–ļ–ĺ—Ä–Ĺ–ĺ—Ā—ā—Ć). Tendency to¬†rely heavily on¬†one prior piece of¬†information when making a¬†decision.
Antitrust laws. Rules and¬†regulations prohibit actions that can restrain competition.
Arbitrage. the¬†practice of¬†buying at¬†a¬†low price in¬†one place and¬†selling higher in¬†another.
Arc elasticity demand. price elasticity that is calculated over a¬†range of¬†prices.
Asset. Something that provides a¬†flow of¬†money or¬†services to¬†the¬†owner.
? Asset beta. constant that measures the¬†sensitivity of¬†an¬†asset‚Äôs return to¬†market movements and, therefore, the¬†asset‚Äôs non-diversifiable risk.
Asymmetric information. a¬†situation in¬†which a¬†buyer and¬†a¬†seller possess different information about a¬†transaction.
Auction market. a¬†market in¬†which products are bought and¬†sold through formal bidding processes.
Average expenditure curve. supply curve representing the¬†price per¬†unit that a¬†firm pays for¬†a¬†good.
Average expenditure. the¬†price paid per¬†unit of¬†a¬†good.
Average fixed cost. Fixed cost / the¬†level of¬†output(?).
Average product. Output per¬†unit of¬†a¬†particular input.¬†
Average total cost. Firm‚Äôs total cost / the¬†level of¬†output.¬†
Average variable cost. variable cost / the¬†level of¬†input.
Bad. the¬†good that is less preferred than more.
Bandwagon (–ľ–į—Ā—Ā–ĺ–≤–ĺ–Ķ –ī–≤–ł–∂–Ķ–Ĺ–ł–Ķ)effect. when a¬†person buys something because others do it either. Positive network externality in¬†which a¬†consumer wishes to¬†possess good in¬†part because others do.¬†
Barrier to¬†entry. Conditions impede (block) entry by¬†new competitors. E.g., when the¬†prices to¬†start are too high or¬†if the¬†monopolists prohibit you from being a¬†partner with anyone.
? Bertrand model. Oligopoly model in¬†which firms produce a¬†homogeneous good, each firm treats the¬†price of¬†its competitors as¬†fixed, and¬†all firms decide simultaneously what price to¬†change.
Bilateral monopoly. Market with one seller and¬†one buyer.
Block pricing. charging different prices for¬†different quantities (‚Äúblocks‚ÄĚ) of¬†a¬†good.
Bond. contract in¬†which a¬†borrower agrees to¬†pay the¬†bondholder (the¬†lender) a¬†stream of¬†money
Bubble. An¬†increase of¬†price not¬†based on¬†fundamentals of¬†demand or¬†value, but¬†instead on¬†a¬†belief that the¬†price will keep going up.
Budget constraints. Constraints that consumers face as¬†a¬†result of¬†limited incomes.
Budget line. All combinations of¬†goods for¬†which the¬†total amount of¬†money spent = income.
Bundling. Practice selling two or¬†more products as¬†a¬†package.
Capital Asset Pricing Model (CAPM). Model in¬†which the¬†risk premium for¬†a¬†capital investment depends on¬†the¬†correlation of¬†the¬†investments return with the¬†return on¬†the¬†entire stock market. (If your return less the¬†market return, then you‚Äôll be paid on¬†this amount?)
? Cardinal utility function. Utility function describing by¬†how much one market basket is preferred to¬†another.
Cartel. Market in¬†which some of¬†all firms explicitly collude (cooperate in¬†a¬†secret by¬†the¬†unlawful way), coordinating prices and¬†output levels to¬†maximize joint profits.
Chain-weighted price index. Cost-of-living index that accounts for¬†changes in¬†quantities of¬†goods and¬†services.
?Coase theorem. Principle that when parties can bargain without cost and¬†to¬†their mutual advantage, the¬†resulting outcome will efficient regardless of¬†how property rights are specified
Cobb-Douglas production function. q = AK^√•L^√ü, where q is the¬†rate of¬†output, K is the¬†quantity of¬†capital, and¬†L is the¬†quantity of¬†labor, and¬†where A, √•, and¬†√ü are constants.
Cobb-Douglas utility function. U(X, Y) = A^√•*Y^(1-√•), where X and¬†Y are two goods and¬†a¬†is a¬†constant.¬†
Common property resource. a¬†resource to¬†which anyone has free access.
Common-value auction. Auction in¬†which the¬†item has the¬†same value to¬†all bidders, but¬†bidders don‚Äôt know. That value precisely and¬†their estimates of¬†it vary.
Company cost of¬†capital. Weighted avatar of¬†the¬†expected return on¬†a¬†company‚Äôs stock and¬†the¬†interest Tate that it pays for¬†debt.
Comparative advantage. situation, in¬†which country 1 has an¬†advantage over country 2 in¬†producing a¬†good because the¬†cost of¬†producing the¬†good in¬†1, relative to¬†the¬†cost of¬†producing other goods in¬†1, is lower than the¬†cost of¬†producing the¬†good in¬†2, relative to¬†the¬†cost of¬†producing other goods in¬†2.¬†
Complements. two goods for¬†which an¬†increase in¬†the¬†price of¬†one leads to¬†a¬†decrease in¬†the¬†quantity demanded of¬†the¬†ofter.
Completely inelastic demand. Principle that consumers will buy a¬†fixed quantity of¬†a¬†good regardless of¬†its price.
Condominium. A¬†housing unit that is individually owned but¬†provides access to¬†common facilities that are paid for¬†and¬†controlled jointly by¬†an¬†association of¬†owners.¬†
Constant returns to¬†scale. Situation in¬†which output doubles when all inputs are doubled.¬†
Constant-cost Industry. Industry whose long-run supply curve is horizontal.¬†
Consumer Price Index. Measure of¬†the¬†aggregate (—Ā–ĺ–≤–ĺ–ļ—É–Ņ–Ĺ—č–Ļ) price level.¬†
Consumer surplus. Difference between what a¬†consumer is willing to¬†pay for¬†a¬†good and¬†the¬†amount actually paid.¬†
Constant curve. curve showing all efficient allocations of¬†goods between who consumers, or¬†of¬†two inputs between two production functions.
Cooperative. Association of¬†businesses, or¬†people jointly owned and¬†operated by¬†members for¬†mutual benefit.¬†
Cooperative game. game in¬†which participants can negotiate binding contracts that allow them to¬†plan joint strategies.
Corner solution. a¬†situation in¬†which the¬†marginal rate of¬†substitution of¬†one good for¬†another in¬†a¬†chosen market basket is not¬†equal to¬†the¬†slope of¬†the¬†budget line.
Cost function. Function relating the¬†cost of¬†production to¬†the¬†level of¬†output and¬†other variables that the¬†firm can control.
Cost-of-living index. Ration of¬†the¬†present cost of¬†a¬†typical bundle of¬†consumer goods and¬†services compared with the¬†cost during a¬†base period.¬†
Cournot equilibrium. Equilibrium in¬†the¬†Cournot model
Cournot model. Oligopoly model in¬†which firms produce a¬†homogeneous (same) good, each firm treats the¬†output of¬†its competitors as¬†fixed, and¬†all firms decide simultaneously (at¬†the¬†same time) how much to¬†produce.
Cross-price elasticity of¬†demand. Percentage change in¬†the¬†quantity demanded of¬†one good resulting from a¬†1-percent increase in¬†the¬†price of¬†another.
Cyclical industries. Industries in¬†which sales tend to¬†magnify cyclical changes in¬†GDP and¬†national income
Deadweight loss. Net loss of¬†total (consumer and¬†producer) surplus.
Decreasing returns to¬†scale. Situation in¬†which output less than doubles when all inputs are doubled. (Less productive if more products)
Decreasing-cost industry. industry, whose long-run supply curve is downward sloping.
Degree of¬†economies of¬†scope (SC). Percentage of¬†cost-saving resulting when two or¬†more products are produced jointly (together) rather than individually. (Mb means by¬†one or¬†two companies)
Demand curve. Relationship between the¬†quantity of¬†a¬†good that consumers are willing to¬†buy and¬†the¬†price of¬†the¬†good.
Derived demand. Demand for¬†an¬†input that depends on, and¬†is derived from, both the¬†firms‚Äô level of¬†output and¬†the¬†cost of¬†inputs.
Deviation. Difference between expected payoff and¬†actual payoff (–≤—č–Ņ–Ľ–į—ā–į).
Diminishing marginal utility. principle that as¬†more of¬†a¬†good is consumed, the¬†consumption of¬†additional amounts will yield smaller additions to¬†utility (–≤—č–≥–ĺ–ī–į, –Ņ—Ä–į–ļ—ā–ł—á–Ĺ–ĺ—Ā—ā—Ć, –Ņ–ĺ–Ľ—Ć–∑–į). The¬†more you consume, the¬†less you need to¬†get the¬†benefit.
Discount rate. The¬†rate used to¬†determine the¬†value today of¬†a¬†dollar received in¬†the¬†future.
Diseconomies of¬†scale. A¬†situation in¬†which a¬†doubling of¬†output requires more than a¬†doubling of¬†cost.
Diseconomies of¬†scope. A¬†situation in¬†which the¬†joint output of¬†a¬†single firm is less than could be achieved by¬†separate firms when each produces a¬†single product.¬†
Diversifiable risk. Risk that can be eliminated either by¬†investing in¬†many projects or¬†by¬†holding the¬†stocks of¬†many companies.
Diversification. Practice of¬†reducing risk by¬†allocating resources to¬†a¬†variety of¬†activities whose outcomes are not¬†closely related.
Dominant Firm. Firm with a¬†large share of¬†total sales that sets the¬†price to¬†maximize profits, taking into account the¬†supply response of¬†smaller firms.
Dominant strategy. Strategy that is optimal no¬†matter what an¬†opponent does.
Double marginalization. when each firm in¬†a¬†vertical chain marks up its price above its marginal cost, thereby increasing the¬†price of¬†the¬†final product.
Duality. Alternative way of¬†looking at¬†the¬†consumer‚Äôs utility maximization decision: Rather than choosing the¬†highest indifference curve, given a¬†budget constraint, the¬†consumer chooses the¬†lowest budget line that touches a¬†given indifference curve.
Duopoly. Market in¬†which two firms compete with each other (Airbus and¬†Boeing).
Dutch auction. Auction in¬†which a¬†seller begins by¬†offering a¬†relatively high price, then reduces it by¬†fixed amounts until the¬†item is sold.
Economic cost. cost to¬†a¬†firm utilizing economic resources in¬†production.
Economic efficiency. Maximisation of¬†aggregate consumer and¬†producer surplus.
Economic rent. Amount that firms are willing to¬†pay for¬†input less the¬†minimum amount necessary to¬†obtain it.
Economics of¬†scale. a¬†situation in¬†which output can be doubled for¬†less than a¬†doubling of¬†cost (So then more, then more effective production).
Economics of¬†scope. Situation in¬†which joint (—Ā–ĺ–≤–ĺ–ļ—É–Ņ–Ĺ—č–Ļ) output of¬†a¬†single firm is greater than output that could be achieved by¬†2 different firms when each produces a¬†single product.
Edgeworth box. a¬†diagram showing all possible allocation of¬†either 2 goods between 2 people or¬†of¬†2 inputs between 2 production processes.
Effective yield (rate of¬†return). percentage return that one receives by¬†investing in¬†a¬†bond.
Efficiency wage. Wage that a¬†firm will pay to¬†an¬†employee as¬†an¬†incentive not¬†to¬†shirk (—Ā—ā–ł–ľ—É–Ľ —á—ā–ĺ–Ī—č –Ĺ–Ķ —É–ļ–Ľ–ĺ–Ĺ—Ź—ā—Ć—Ā—Ź –ĺ—ā —Ä–į–Ī–ĺ—ā—č, —ā–Ķ–ľ —Ā–į–ľ—č–ľ —É–ľ–Ķ–Ĺ—Ć—ą–į—Ź –Ī–Ķ–∑—Ä–į–Ī–ĺ—ā–ł—Ü—É).
Efficiency wage theory. Explanation for¬†the¬†presence of¬†unemployment and¬†wage discrimination which recognizes that labor productivity may be affected by¬†the¬†wage rate.
Elasticity. Percentage change in¬†one variable resulting from a¬†1-percent increase in¬†another variable.
Emissions fee. Charge levied on¬†each unit of¬†a¬†firm‚Äôs emissions.
Emissions standard. Legal limit in¬†the¬†number of¬†pollutants that a¬†firm can emit.
? Endowment (–Ņ–ĺ–∂–Ķ—Ä—ā–≤–ĺ–≤–į–Ĺ–ł–Ķ) effect. Tendency of¬†individuals to¬†value an¬†item more when they own it than when they don‚Äôt.
Engel curve. Curve relating the¬†quantity of¬†a¬†good consumed to¬†income.¬†
English auction. Auction in¬†which a¬†seller actively solicits progressively higher bids from a¬†group of¬†potential buyers.
? Equal marginal principle. Principle that utility is maximised when the¬†consumer has equalised the¬†marginal utility per¬†dollar of¬†expenditure across all goods.
Equilibrium (market clearing) price. Price that equates the¬†quantity supplied to¬†the¬†quantity demanded.¬†
? Equilibrium in¬†dominant strategies. Outcome of¬†a¬†game in¬†which each firm is doing the¬†best it can regardless of¬†what its competitors are doing.
Excess demand. When the¬†quantity demanded of¬†a¬†good exceeds the¬†quantity supplied.
Excess supply. When the¬†quantity supplied of¬†a¬†good exceeds the¬†quantity demanded.
Exchange economy. Market in¬†which 2 or¬†more consumers trade 2 goods among themselves.
? Expansion path. Curve passing through points of¬†tangency between a¬†firm‚Äôs isocost lines and¬†its isoquants.
Expected return. Return that an¬†asset should earn on¬†average.¬†¬†
Expected utility. Sum of¬†the¬†utilities associated with all possible outcomes, weighted by¬†the¬†probability that each outcome will occur.
Expected value. Probability-weighted average of¬†the¬†payoffs associated with all possible outcomes.
? Extensive form or¬†a¬†game. Representation of¬†possible moves in¬†a¬†game in¬†the¬†form of¬†a¬†decision tree.
Extent of¬†a¬†market. Boundaries of¬†a¬†market, both geographical and¬†in¬†terms of¬†range of¬†products produced and¬†sold within it.
? Externality. Action by¬†either a¬†producer or¬†a¬†consumer which affects other producers or¬†consumers, but¬†is not¬†accounted for¬†in¬†the¬†market price.
Factors of¬†production. Inputs into the¬†production process (e.¬†g. Labor, capital, materials).
First-degree price discrimination. Practice of¬†charging each customer her reservation price.
First-price auction. Auction in¬†which the¬†sales price is equal to¬†the¬†highest bid.
Fixed cost (FC). Cost that does not¬†vary with the¬†level of¬†output and¬†that can be eliminated only by¬†shutting down.
Fixed input. Production factor that cannot be varied.
? Fixed-proportions production function. Production function with L-shaped isoquants, so that only one combination of¬†labor and¬†capital can be used to¬†produce each level of¬†output.
Fixed-weight index. Cost-of-living index in¬†which the¬†quantities of¬†goods and¬†services remain unchanged.
Framing. Tendency to¬†rely on¬†the¬†context in¬†which a¬†choice is described when making a¬†decision.
Free entry (or¬†exit). Condition under which there are no¬†special costs that make it difficult for¬†a¬†firm to¬†enter (or¬†exit) an¬†industry.
Free rider. Consumer or¬†producer who does not¬†pay for¬†a¬†nonexclusive good in¬†the¬†expectation that others will.
Game. Situation in¬†which players (participants) make strategic decisions that take into account each other‚Äôs actions and¬†responses.
General equilibrium analysis. Simultaneous (–ĺ–ī–Ĺ–ĺ–≤—Ä–Ķ–ľ–Ķ–Ĺ–Ĺ–ĺ–Ķ, —Ā–ł–Ĺ—Ö—Ä–ĺ–Ĺ–Ĺ–ĺ–Ķ) determination of¬†the¬†prices and¬†quantities in¬†all relevant markets, taking feedback effects into account.
? Giffen good. Good whose demand curve slopes upward because the¬†(negative) income effect is larger than the¬†substitution (–∑–į–ľ–Ķ—Č–Ķ–Ĺ–ł–Ķ) effect. (e.¬†g. with luxury good when price is low, then demand falls, or¬†cheap fast food or¬†cheap fruits**. if it‚Äôs to¬†cheap, then people will be afraid to¬†buy it).
Hicksian substitution effect. alternative to¬†the¬†Slutsky equation for¬†decomposing price changes without resource to¬†indifference curves.
Horizontal integration. Organisational form in¬†which several plants produce the¬†same or¬†related products for¬†a¬†firm.
Human capital. Knowledge, skills, and¬†experience that make an¬†individual more productive and¬†thereby able to¬†earn a¬†higher income over a¬†lifetime¬†
Ideal cost-of-living index. cost of¬†attaining a¬†given level of¬†utility at¬†current prices relative to¬†the¬†cost of¬†attaining the¬†same utility at¬†base-year prices.
Import quota. Limit on¬†the¬†quantity of¬†a¬†good that can be imported
Income effect. Change in¬†consumption of¬†a¬†good resulting from an¬†increase in¬†purchasing power, with relative prices held constant.
Income elasticity of¬†demand. Percentage change in¬†the¬†quantity demanded resulting from a¬†1-percent increase in¬†income
Income-consumption curve. Curve tracing the¬†utility-maximizing combinations of¬†2 goods as¬†a¬†consumer‚Äôs income changes.
Increasing returns to¬†scale. Situation in¬†which output more than doubles when all inputs are doubled.
Increasing-cost industry. Industry whose long-run supply curve is upward sloping.
Indifference curve. Curve representing all combinations of¬†market baskets that provide a¬†consumer with the¬†same level of¬†satisfaction. (2 indifference curves can‚Äôt intersect).
Indifference map. Graph containing a¬†set of¬†indifference curves showing the¬†market baskets among which a¬†consumer is indifferent.
Individual demand curve. Curve relating the¬†quantity of¬†a¬†good that a¬†single consumer will buy to¬†its price.
Inferior (–Ņ–ĺ–ī—á–ł–Ĺ—Ď–Ĺ–Ĺ—č–Ļ) good. A¬†good that has a¬†negative income effect.
Infinitely elastic demand. Principle that consumers will buy as¬†much of¬†a¬†good as¬†they can get at¬†a¬†single price, but¬†for¬†any higher price, the¬†quantity demanded drops to¬†zero, while for¬†any lower price, the¬†quantity demanded increases without limit.
Informational cascade. An¬†assessment (e.¬†g., of¬†investment opportunity) based in¬†part on¬†the¬†actions of¬†others, which in¬†turn were based on¬†the¬†actions of¬†others.
Interest rate. the¬†rate at¬†which one can borrow or¬†lend money.
? Intertemporal price discrimination. Practice of¬†separating consumers with different demand functions into different groups by¬†charging different prices at¬†different points in¬†time. (Hardcover and¬†paperback books difference at¬†a¬†price is high)
Isocost line. Graph, showing all possible combinations of¬†labor and¬†capital that can be purchased for¬†a¬†given total cost.
Isoelastic demand curve. Demand curve with constant price elasticity.
Isoquant. curve showing all possible combinations of¬†inputs that yield the¬†same output.¬†
Isoquant map. graph combining a¬†number of¬†isoquants used to¬†describe a¬†production function.
Kinked demand curve model. oligopoly model in¬†which each firm faces a¬†demand curve kinked at¬†the¬†currently prevailing price: at¬†higher prices, demand is very elastic, whereas at¬†lower prices, it is inelastic.
Labor productivity. Average product of¬†labor for¬†an¬†entire industry or¬†for¬†the¬†economy as¬†a¬†whole.
Lagrangian. function to¬†be maximized or¬†minimised, plus a¬†variable (the¬†Long-range multiplier) multiplied by¬†the¬†constraint.
Laspeyres price index. Amount of¬†money at¬†current-year prices that an¬†individual requires to¬†purchase a¬†bundle of¬†goods and¬†services chosen in¬†a¬†base year / cost of¬†purchasing the¬†same bundle at¬†base-year prices.
Law of¬†diminishing marginal returns. Principle that as¬†the¬†use of¬†an¬†input increases with other inputs fixed, the¬†resulting additions to¬†output will eventually decrease.
Law of¬†small numbers. Tendency to¬†overstate the¬†probability that a¬†certain event will occur when faced with relatively little information.¬†
Learning curve. Graph relating amount of¬†inputs needed by¬†a¬†firm to¬†produce each unit of¬†output to¬†its cumulative output.
Least-squares criterion. Criterion of¬†‚Äúbest fit‚ÄĚ used to¬†choose values for¬†regression parameters, usually by¬†minimising the¬†sum of¬†squared residuals between the¬†actual values of¬†the¬†dependent variable and¬†the¬†fitted values.
Lerner Index of¬†Monopoly Power. Measure of¬†monopoly power = excess of¬†price / marginal cost as¬†a¬†fraction of¬†price.
Linear demand curve. Demand curve that is a¬†straight line.
? Linear regression. Model specifying a¬†linear relationship between a¬†dependent variable and¬†several independent (or¬†explanatory) variables and¬†an¬†error term
Long run. Amount of¬†time needed to¬†make all production inputs variable.
Long-run average cost curve (LAC). Curve relating average cost of¬†production to¬†output when all inputs, including capital, are variable.
Long-run competitive equilibrium. All firms in¬†an¬†industry are maximizing profit, no¬†firm has an¬†incentive (—Ā—ā–ł–ľ—É–Ľ) to¬†enter or¬†exit, and¬†price is such that quantity supplied equals quantity demanded.
Long-run marginal cost curve (LMC). Curve showing the¬†change in¬†long-run total cost as¬†output is increased incrementally by¬†1 unit.
Loss aversion. Tendency for¬†individuals to¬†prefer avoiding losses over acquiring gains.
Macroeconomics. branch of¬†economics that deals with aggregate economic variables, such as¬†the¬†level and¬†growth rate of¬†national output, interest rates, unemployment, and¬†inflation.
Marginal benefit. Benefit from the¬†consumption of¬†one additional unit of¬†a¬†good.
Marginal cost. Cost of¬†one additional unit of¬†a¬†good.
Marginal expenditure. Additional cost of¬†buying one more unit of¬†a¬†good
Marginal expenditure curve. curve describing the¬†additional cost of¬†purchasing one additional unit of¬†a¬†good.
Marginal external benefit. Increased benefit that accrues (–Ĺ–į—Ä–į—Č–ł–≤–į–Ķ—ā –Ņ—Ä–ĺ—Ü–Ķ–Ĺ—ā) to¬†other parties as¬†a¬†firm increases output by¬†one unit.
Marginal external cost. Increase in¬†cost imposed external as¬†one or¬†more firms increase output by¬†one unit.
Marginal product. Additional output produced as¬†an¬†input is increased by¬†one unit.
Marginal rate of¬†substitution (MRS). Maximum amount of¬†a¬†good that a¬†consumer is willing to¬†give up in¬†order to¬†obtain one additional unit of¬†another good.
Marginal rate of¬†technical substitution (MRTS). Amount by¬†which the¬†quantity of¬†one input can be reduced when one extra unit of¬†another input is used, so that output remains constant.¬†
? Marginal rate of¬†transformation. Amount of¬†one good that must be given up to¬†produce one additional unit of¬†a¬†second good.
Marginal revenue. Change in¬†revenue resulting from an¬†increase in¬†output by¬†one unit.
Marginal revenue product. Additional revenue resulting from the¬†sale of¬†output created by¬†the¬†use of¬†one additional unit of¬†an¬†input.
Marginal social benefit. Sum of¬†the¬†marginal private benefit + marginal external benefit.
Marginal social cost. Sum of¬†the¬†marginal cost of¬†production and¬†the¬†marginal external cost.
Marginal utility (MU). Additional satisfaction obtained from consuming one additional unit of¬†a¬†good.
Marginal value. Additional benefit derived from purchasing one more unit of¬†a¬†good.
Market. Collection of¬†buyers and¬†sellers that, through their actual or¬†potential interactions, determine the¬†price of¬†product or¬†set of¬†products.
Market basket (or¬†bundle). List with specific quantities of¬†one or¬†more goods.¬†
Market definition. Determination of¬†the¬†buyers, sellers, and¬†range of¬†products that should be included in¬†a¬†particular market.
Market demand curve. curve relating the¬†quantity of¬†a¬†good that all consumers in¬†a¬†market will buy to¬†its price.¬†
? Market failure. Situation in¬†which an¬†unregulated competitive market is inefficient because prices fail to¬†provide proper signals to¬†consumers and¬†producers.
Market mechanism. Tendency In¬†a¬†free market for¬†price to¬†change until the¬†market clears.
Market power. Ability of¬†a¬†seller or¬†buyer to¬†affect the¬†price of¬†a¬†good.
Market price. Price prevailing (–Ņ—Ä–Ķ–ĺ–Ī–Ľ–į–ī–į—é—Č–į—Ź) in¬†a¬†competitive market.
Market signalling. Process by¬†which sellers send signals to¬†buyers conveying information about product quality.
Maximin strategy. strategy that maximises the¬†minimum gain that can be earned.
Method of¬†Lagrange multipliers. Technique to¬†max or¬†min a¬†function subject to¬†one or¬†more constraints.
Microeconomics. a¬†branch of¬†economics that deals with the¬†behavior of¬†individual economic units¬†‚Äď consumers, firms, workers, and¬†investors¬†‚Äď as¬†well as¬†the¬†markets that these units comprise.
Mixed bundling. Selling two or¬†more goods both as¬†a¬†package and¬†individually (MB like gel and¬†shampoo for¬†gifts and¬†normally separately)
Mixed strategy. Strategy in¬†which a¬†player makes a¬†random choice among two or¬†more possible actions based on¬†a¬†set of¬†chosen probabilities.
Monopolistic competition. Market in¬†which firms can enter freely, each producing its own brand or¬†version of¬†a¬†differentiated product.¬†
Monopoly. Market with only one seller.
Monopsony. Market with only one buyer.
Monopsony power. buyer‚Äôs ability to¬†affect the¬†price of¬†a¬†good.
Moral hazard. when a¬†party whose actions are unobserved can affect the¬†probability or¬†magnitude of¬†a¬†payment associated with an¬†event.
Multiple regression analysis. Statistical procedure for¬†quantifying economic relationships and¬†testing hypotheses about them.
Mutual fund. Organisation that pools funds of¬†individual investors to¬†buy a¬†large number of¬†different stocks or¬†other financial assets.
Nash equilibrium. set of¬†strategies or¬†actions in¬†which each firm does the¬†best it can given its competitors‚Äô actions.¬†
Natural monopoly. Firm that can produce the¬†entire output of¬†the¬†market at¬†a¬†cost lower than what it would be if there were several firms.
Negatively correlated variables. Variables having a¬†tendency to¬†move in¬†opposite directions.
Net present value (NPV) criterion. Rule holding that one should invest in¬†the¬†present value of¬†the¬†expected future cash flow from on¬†investment is larger than the¬†cost of¬†the¬†investment.
Network externality. Situation in¬†which each Individual‚Äôs demand depends on¬†the¬†purchases of¬†other individuals. (If everyone buys Tesla, I buy too)
Nominal price. Absolute price of¬†a¬†good, unadjusted for¬†inflation.
Noncooperative game. Game in¬†which negation (–ĺ–Ņ—Ä–ĺ–≤–Ķ—Ä–≥–į—é—Č–ł–Ķ) and¬†enforcement of¬†binding (–ĺ–Ī—Ź–∑—č–≤–į—é—Č–ł–Ķ) contracts are not¬†possible.
Nondiversifiable risk. Risk that cannot be eliminated by¬†investing in¬†many projects or¬†by¬†holding the¬†stocks of¬†many companies.
? Nonexclusive good. Good that is difficult or¬†impossible to¬†charge for¬†its use, and¬†this good can‚Äôt be excluded from consumption.
Nontrivial good. Good for¬†which the¬†marginal cost of¬†its provision to¬†an¬†additional consumer is zero (e.¬†g., a¬†game license for¬†the¬†second friend)
Normative analysis. Analysis examining questions of¬†what ought to¬†be.
Oligopoly. Market in¬†which only a¬†few firms compete with one another, and¬†entry by¬†new firms is impeded (barrier)
Oligopsony. market with only a¬†few buyers.
Opportunity cost. Cost associated with opportunities forgone the¬†firm‚Äôs resources are not¬†put to¬†their best alternative use.
Opportunity cost of¬†capital. Rate of¬†return that one could earn by¬†investing in¬†an¬†alternate project with similar risk.
**Optimal strategy. -Strategy that maximizes a¬†player‚Äôs expected payoff.
Ordinal utility function. Utility function that generates a¬†ranking of¬†market baskets in¬†order of¬†most to¬†least preferred.
Overconfidence. Overestimating an¬†Individual‚Äôs prospects or¬†abilities.
Over-optimism. An¬†unrealistic belief that things will work out well.
Over-precision. An¬†unrealistic belief that one can accurately predict outcomes.
Paasche index. Amount of¬†money at¬†current-year prices that an¬†individual requires to¬†purchase a¬†current bundle of¬†goods and¬†services / the¬†cost of¬†purchasing the¬†same bundle in¬†a¬†base year.
Pareto efficient allocation. Allocation of¬†goods in¬†which no¬†one can be made better off unless someone else is made worse off.
Parallel conduct. Form of¬†implicit (—Ā–ļ—Ä—č—ā—č–Ļ) collusion (—Ā–≥–ĺ–≤–ĺ—Ä) in¬†which one firm consistently follows actions of¬†another.
Partial equilibrium analysis. Determination of¬†equilibrium prices and¬†quantities in¬†a¬†market independent of¬†effects from other markets.
Payoff. (–≤—č–Ņ–Ľ–į—ā–į) value associated with a¬†possible outcome.
Payoff matrix. Table showing profit (or¬†payoff) to¬†each firm given its decision and¬†the¬†decision of¬†its competitor.
Peak-load pricing. Practice of¬†charging higher prices during peak periods when capacity constraints (–ĺ–≥—Ä–į–Ĺ–ł—á–Ķ–Ĺ–ł—Ź) cause marginal costs to¬†be high (e.¬†g., in¬†winter people need ski, but¬†the¬†production is restricted).
Perfect complements. Two goods for¬†which the¬†Marginal Rate of¬†Substitution (MRS is how much of¬†one good you‚Äôre ready to¬†give up for¬†another) is zero or¬†infinite; The¬†indifference curves are shaped as¬†right angles.
Perfect substitutes. Two goods for¬†which the¬†Marginal Rate of¬†Substitution of¬†one for¬†the¬†other is constant.¬†¬†
Perfectly competitive market. Market with many many buyers and¬†sellers, so that no¬†single buyer or¬†seller has a¬†significant impact on¬†price.
Perpetuity. Bond paying out a¬†fixed amount of¬†money each year forever.
Point of¬†elasticity of¬†demand. Price elasticity at¬†a¬†particular point on¬†the¬†demand curve.
Positive analysis. Analysis describing relationships of¬†cause and¬†effect
Positively correlated variables. Variables having a¬†tendency to¬†move in¬†the¬†same direction.
Predatory pricing. Practice of¬†pricing to¬†drive current competitors out of¬†business and¬†to¬†discourage new entrants in¬†a¬†market so that a¬†firm can enjoy higher future profits.
Present discounted value (PDV). The¬†current value of¬†an¬†expected future cash flow.
Price discrimination. Practice of¬†charging different prices to¬†different consumers for¬†similar goods.
Price elasticity of¬†demand. Percentage change in¬†quantity demanded of¬†a¬†good resulting from a¬†1-percent increase in¬†price.
Price elasticity of¬†supply. Percentage change in¬†quantity supplied of¬†a¬†good resulting from a¬†1-percent increase in¬†price.
Price leadership. Pattern of¬†pricing in¬†which one firm regularly announces price changes that other firms should match.
Price of¬†risk. Extra risk that an¬†investor must incur to¬†enjoy a¬†higher expected return.
? Price rigidity. characteristic of¬†oligopolistic markets by¬†which firms are reluctant (unwilling) to¬†change prices even if costs of¬†demands change.
Price signaling. form of¬†implicit collusion (—Ā–ļ—Ä—č—ā—č–Ļ —Ā–≥–ĺ–≤–ĺ—Ä) in¬†which a¬†firm announces a¬†price increase in¬†the¬†hope that other firms will follow suit.
Price support. Price set by¬†government above free-market level and¬†maintained by¬†governmental purchases of¬†excess supply.
Price taker. Firm that has no¬†influence over market price and¬†thus takes the¬†price as¬†given.
Price-consumption curve. Curve tracing the¬†utility-maximizing combinations of¬†two goods as¬†the¬†price of¬†one changes.
Principal. (Director) Individual who employs one or¬†more agents to¬†achieve an¬†objective.
Principal-agent problem. Problem arising when agents (e.¬†g., firm‚Äôs managers) pursue their own goals rather than the¬†goals of¬†principals (e.¬†g., the¬†firm‚Äôs owners).
Prisoners‚Äô dilemma. Game theory example in¬†which two prisoners must separately decide whether to¬†sell the¬†other prisoner out or¬†not**. if he does, he will not¬†get a¬†sentence, when another gets ten years; if they both don‚Äôt confess, then they get one year, and¬†if both confess, then they will get 15 years (Time can differ).
Private-value auction. Auction in¬†which each bidder knows his or¬†her individual valuation of¬†the¬†object up for¬†bid, with valuations differing from bidder to¬†bidder.
Profitability. Likelihood that a¬†given outcome will occur.¬†
Producer Price Index. Measure of¬†the¬†aggregate price level for¬†intermediate products and¬†wholesale goods.
Producer surplus. Sum over all units produced by¬†a¬†firm of¬†differences between the¬†market price of¬†a¬†good and¬†the¬†marginal cost of¬†production.¬†
? Product transformation curve. Curve showing the¬†various combination of¬†two different outputs (products) that can be produced with a¬†given set of¬†inputs.
Production function. Function showing the¬†highest output that a¬†firm can produce for¬†every specified combination of¬†inputs.
Production possibilities frontier. Curve showing the¬†combinations of¬†two goods that can be produced with fixed quantities of¬†inputs.
Profit. Difference between revenue and¬†total cost.
Property rights. Legal rules stating what people or¬†firms may do with their property.
Public good. Nonexclusive and¬†non-rival (–Ĺ–Ķ–ļ–ĺ–Ĺ–ļ—É—Ä–Ķ–Ĺ—ā–ĺ—Ā–Ņ–ĺ—Ā–ĺ–Ī–Ĺ—č–Ļ) good: the¬†marginal cost of¬†provision to¬†an¬†additional consumer is zero, and¬†people cannot be excluded from consuming it.
Pure bundling. Selling products only as¬†a¬†package.
Pure strategy. Strategy in¬†which a¬†player makes a¬†specific choice or¬†takes a¬†specific action.
Quantity forcing. Use of¬†a¬†sales quota or¬†other incentives to¬†make downstream firms sell as¬†much as¬†possible.
Rate-of-return regulation. Maximum price allowed by¬†a¬†regulatory agency is based on¬†the¬†(expected) rate of¬†return that a¬†firm will earn.
Reaction curve. Relationship between a¬†firm‚Äôs profit-maximizing output and¬†the¬†amount that the¬†firm thinks its competitor will produce.
Real price. Price of¬†a¬†good relative to¬†an¬†aggregate measure of¬†prices; price adjusted for¬†inflation.
Real return. Simple (or¬†nominal) return on¬†an¬†asset**. the¬†rate of¬†inflation.
Reference point. The¬†point from which an¬†individual makes a¬†consumption decision.
Rent-seeking. Spending money in¬†socially unproductive efforts to¬†acquire, maintain, or¬†exercise monopoly.
Rental rate. Cost per¬†year of¬†renting one unit of¬†capital.
Repeated game. Game in¬†which actions are taken, and¬†payoffs received over and¬†over again.
Reservation price. Maximum price that a¬†customer is willing to¬†pay for¬†a¬†good.
Return. Total monetary flow of¬†an¬†asset as¬†a¬†fraction of¬†its price.
Returns to¬†scale. Rate at¬†which output increases as¬†inputs are increased proportionately.¬†
Rist averse (opposition). Condition of¬†preferring a¬†certain income to¬†a¬†risky income with the¬†same expected value.
Risk loving. Condition of¬†preferring a¬†risky income to¬†a¬†certain income with the¬†same expected value.
Risk neutral. Condition of¬†being indifferent between a¬†certain income and¬†an¬†uncertain income with the¬†same expected value.¬†
Risk premium. Maximum amount of¬†money that a¬†risk-averse individual will pay to¬†avoid taking a¬†risk.
Riskless (risk-free) asset. Asset that provides a¬†flow of¬†money or¬†services that is known with certainty.
Risky asset. Asset that provides an¬†uncertain flow of¬†money or¬†services to¬†its owner.
? R-squared (R^2). the¬†percentage of¬†the¬†variation in¬†the¬†independent variable that is accounted for¬†by¬†all the¬†explanatory variables.
Salience. (–∑–Ĺ–į—á–ł–ľ–ĺ—Ā—ā—Ć) The¬†perceived importance of¬†a¬†good or¬†service.
Sample. Set of¬†observations for¬†study, drawn from a¬†larger universe.
Sealed-bid auction. Auction in¬†which all bids are made simultaneously in¬†sealed (–Ņ–Ķ—á–į—ā–Ĺ—č–Ļ) envelopes (–ļ–ĺ–Ĺ–≤–Ķ—Ä—ā), the¬†winning bidder being the¬†Individual who has submitted the¬†highest bid.
Second-degree price discrimination. Practice of¬†charging different prices per¬†unit for¬†different quantities of¬†the¬†same good or¬†service.
Second-price auction. Auction in¬†which the¬†sales price is equal to¬†the¬†second-highest bid. (Hmm, what if I say an¬†infinity on¬†the¬†bet of¬†1$?)
Sequential game. Game in¬†which players move in¬†turn, responding to¬†each other‚Äôs actions and¬†reactions.
? Shirking (avoiding) model. Principle that workers still have an¬†incentive to¬†shirk (=avoid) if a¬†firm pays them a¬†market-clearing wage because fired workers can be hired somewhere else for¬†the¬†same wage.
Short-run. Period of¬†time in¬†which quantities of¬†one or¬†more production factors cannot be changed.
Short-run average cost curve (SAC). Curve relating average cost of¬†production to¬†output when level of¬†capital is fixed.
Shortage. Situation in¬†which the¬†quantity demanded exceeds the¬†quantity supplied.
? Slutsky equation. Formula for¬†decomposing the¬†effects of¬†a¬†price change into effects of¬†substitution (–∑–į–ľ–Ķ–Ĺ—č) and¬†income.
? Snob effect. Negative network externality in¬†which a¬†consumer wishes to¬†own an¬†exclusive or¬†unique good.
Social rate of¬†discount. Opportunity cost to¬†society as¬†a¬†whole of¬†receiving an¬†economic benefit In¬†the¬†future rather than in¬†the¬†present.
Social welfare function. Measure describing the¬†well-being of¬†society as¬†a¬†whole in¬†terms of¬†the¬†utilities of¬†individual members.
Specific tax. Tax of¬†a¬†certain amount of¬†money per¬†unit sold.
Speculative demand. Demand-driven not¬†by¬†the¬†direct benefits one obtains from owning or¬†consuming a¬†good but¬†instead by¬†an¬†expectation that the¬†price of¬†the¬†goodwill increase.¬†
? Stackelberg model. Oligopoly model in¬†which one firm sets its output before other firms do.
Standard deviation. Square root of¬†weighted average of¬†the¬†squares of¬†the¬†deviations (–ĺ—ā–ļ–Ľ–ĺ–Ĺ–Ķ–Ĺ–ł–Ļ) of¬†the¬†payoffs associated with each outcome from their expected values.
Standard error of¬†the¬†regression. estimate of¬†the¬†standard deviation of¬†the¬†regression error.
Stock of¬†capital. Total amount of¬†capital available for¬†use in¬†production.
? Stock externality. Accumulated result of¬†action by¬†a¬†producer of¬†the¬†consumer which, though not¬†accounted for¬†in¬†the¬†market‚Äôs price, affects other producers or¬†consumers.
Strategy. Rule or¬†plan of¬†action for¬†playing a¬†game
Subsidy. (negative tax) Payment reducing the¬†buyer‚Äôs price below the¬†seller‚Äôs price.¬†
Substitutes. two goods for¬†which an¬†increase in¬†the¬†price of¬†one leads to¬†an¬†increase in¬†the¬†quantity of¬†the¬†other.
Substitution effect. Change in¬†consumption of¬†a¬†good associated with a¬†change in¬†its price, with the¬†level of¬†utility held constant.
Sunk cost. Expenditure that has been made and¬†cannot be recovered.
Supply curve. Relationship between the¬†quantity of¬†a¬†good that producers are willing to¬†sell and¬†the¬†price of¬†a¬†good.
Surplus. Situation in¬†which the¬†quantity supplied exceeds the¬†quantity demanded.
Tariff. Tax on¬†an¬†imported good.
?Technical efficiency. Condition under which (different?) firms combine inputs to¬†produce a¬†given output as¬†inexpensively as¬†possible.
Technological change. Development of¬†new technologies allowing factors of¬†production to¬†be used more effectively.
Theory of¬†consumer behavior. Description of¬†how consumers allocate incomes among different goods and¬†services to¬†maximize their well-being.
Theory of¬†the¬†firm. Explanation of¬†how a¬†firm makes cost-minimizing production decisions and¬†how a¬†firm makes cost-minimizing production decisions, and¬†how its cost varies with its output.
Third-degree price discrimination. Practice of¬†dividing consumers into two or¬†more groups with separate demand curves and¬†charging different prices to¬†each group.
Tit-for-tat strategy. Repeated-game strategy in¬†which a¬†player responds in¬†kind to¬†an¬†opponent‚Äôs previous play, cooperating with cooperative opponents and¬†retaliating (make an¬†attack in¬†return) against uncooperative ones.¬†
Total cost (TC or¬†C). Total economic cost of¬†production, consisting of¬†fixed and¬†variable costs (TC = FC + VC).
Transfer prices. Internal prices at¬†which parts and¬†components from upstream divisions are ‚Äúsold‚ÄĚ to¬†downstream divisions within a¬†firm.
Tradeable emissions permit. System of¬†marketable permits, allocated among firms, specifying the¬†maximum level of¬†emissions that can be generated.
Two-part tariff. Form of¬†pricing in¬†which consumers are charged both an¬†entry and¬†a¬†usage fee.
Tying. Practice of¬†requiring a¬†customer to¬†purchase one good in¬†order to¬†purchase another.
User cost of¬†capital. The¬†annual cost of¬†owning and¬†using a¬†capital asset = economic depreciation + forgone interest.
User cost of¬†production. The¬†opportunity cost of¬†producing and¬†selling a¬†unit today and¬†so making it unavailable for¬†production and¬†sale in¬†the¬†future.
? Utility. (–ü–ĺ–Ľ–Ķ–∑–Ĺ–ĺ—Ā—ā—Ć/–Ņ—Ä–į–ļ—ā–ł—á–Ĺ–ĺ—Ā—ā—Ć) Numerical score representing the¬†satisfaction that a¬†consumer gets from a¬†given market basket.
Utility function. Formula that assigns a¬†level of¬†utility to¬†the¬†individual market basket.
Utility possibilities frontier. Curve showing all efficient allocations of¬†resources measured in¬†terms of¬†the¬†utility levels of¬†two individuals.
? Value of¬†complete information. Difference between the¬†expected value of¬†a¬†choice when there is complete information and¬†the¬†expected value when information is incomplete.
Variability. Extent to¬†which possible outcomes of¬†an¬†uncertain event differ.
Variable cost (VC). Cost that varies as¬†output varies.¬†
Variable profit. Sum of¬†profits on¬†each incremental unit produced by¬†a¬†firm that means profit ignoring fixed costs.
Vertical Integration. Organisational form in¬†which a¬†firm contains several divisions, with some producing parts and¬†components that others use to¬†produce finished products.
Welfare economics. Normative (through norms and¬†standards) evaluation of¬†markets and¬†economic policy.
Welfare effects. Gains and¬†losses to¬†consumers and¬†producers.
Winner‚Äôs curse. Situation in¬†which the¬†winner of¬†a¬†common-value auction is worse off as¬†a¬†consequence of¬†overestimating the¬†value of¬†the¬†item and¬†thereby overbidding (—Ā–ł—ā—É–į—Ü–ł—Ź, –≤ –ļ–ĺ—ā–ĺ—Ä–ĺ–Ļ –Ņ–ĺ–Ī–Ķ–ī–ł—ā–Ķ–Ľ—Ć –į—É–ļ—Ü–ł–ĺ–Ĺ–į —Ā –ĺ–Ī—Č–Ķ–Ļ —Ā—ā–ĺ–ł–ľ–ĺ—Ā—ā—Ć—é –Ĺ–į—Ö–ĺ–ī–ł—ā—Ā—Ź –≤ —Ö—É–ī—ą–Ķ–ľ –Ņ–ĺ–Ľ–ĺ–∂–Ķ–Ĺ–ł–ł –≤ —Ä–Ķ–∑—É–Ľ—Ć—ā–į—ā–Ķ –∑–į–≤—č—ą–Ķ–Ĺ–ł—Ź —Ā—ā–ĺ–ł–ľ–ĺ—Ā—ā–ł –Ņ—Ä–Ķ–ī–ľ–Ķ—ā–į –ł, —Ā–Ľ–Ķ–ī–ĺ–≤–į—ā–Ķ–Ľ—Ć–Ĺ–ĺ, –Ņ–Ķ—Ä–Ķ–ļ—É–Ņ–ļ–ł).
Zero economic profit. A¬†firm is earning a¬†normal return on¬†its investment, which means that it is doing as¬†well as¬†it could by¬†investing its money elsewhere.