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accounting profit
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the difference between a firm's total revenue and its explicit costs
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allocative function of price
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changes in prices direct resources away from overcrowded markets and toward markets that are underserved
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barrier to entry
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any force that prevents firms from entering a new market
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economic loss
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an economic profit that is less than zero
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economic profit (or excess profit)
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the difference between a firm's total revenue and the sum of its explicit and implicit costs
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economic rent
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that part of the payment for a factor of production that exceeds the owner's reservation price, the price below which the owner would not supply the factor
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efficient (or Pareto efficient)
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a situation is efficient if no change is possible that will help some people without harming others
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explicit costs
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the actual payments a firm makes to its factors of production and other suppliers
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implicit costs
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the opportunity costs of the resources supplied by the firm's owners
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invisible hand theory
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Adam Smith's theory that the actions of independent, self-interested buyers and sellers will often result in the most efficient allocation of resources
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normal profit
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the opportunity cost of the resources supplied by the firm's owners, equal to accounting profit minus economic profit
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rationing function of price
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changes in prices distribute scarce goods to those consumers who value them most highly
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constant returns to scale
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a production process is said to have constant returns to scale if, when all inputs are changed by a given proportion, output changes by the same proportion
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cost-plus regulation
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a method of regulation under which the regulated firm is permitted to charge prices that cover explicit costs of production plus a markup to cover the opportunity cost of resources provided by the firm's owners
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deadweight loss
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the loss of consumer and producer surplus caused by disparity between price and marginal cost
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hurdle method of price discrimination
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the practice by which a seller offers a discount to all buyers who overcome some obstacle
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imperfectly competitive firm (or price setter)
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a firm that has at least some control over the market price of its product
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increasing returns to scale (or economies of scale)
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a production process is said to have increasing returns to scale if, when all inputs are changed by a given proportion, output changes by more than that proportion
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marginal revenue
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the change in a firm's total revenue that results from a one-unit change in output
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market power
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a firm's ability to raise the price of a good without losing all its sales
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monopolistic competition
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an industry structure in which a large number of firms produce slightly differentiated products that are reasonably close substitutes for one another
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natural monopoly
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a monopoly that results from economies of scale (increasing returns to scale)
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oligopoly
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an industry structure in which a small number of large firms produce products that are either close or perfect substitutes
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perfect hurdle
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a threshold that completely segregates buyers whose reservation prices lie above it from others whose reservation prices lie below it, imposing no cost on those who jump the hurdle
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perfectly discriminating monopolist
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a firm that charges each buyer exactly his or her reservation price
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price discrimination
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the practice of charging different buyers different prices for essentially the same good or service
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pure monopoly
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the only supplier of a unique product with no close substitutes
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basic elements of a game
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the players, the strategies available to each player, and the payoffs each player receives for each possible combination of strategies
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cartel
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a coalition of firms that agree to restrict output for the purpose of earning an economic profit
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commitment problem
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a situation in which people cannot achieve their goals because of an inability to make credible threats or promises
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credible promise
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a promise to take an action that is in the promiser's interest to keep
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credible threat
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a threat to take an action that is in the threatener's interest to carry out
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decision tree (or game tree)
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a diagram that describes the possible moves in a game in sequence and lists the payoffs that correspond to each possible combination of moves
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dominant strategy
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one that yields a higher payoff no matter what the other players in a game choose
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dominated strategy
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any other strategy available to a player who has a dominant strategy
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Nash equilibrium
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any combination of strategy choices in which each player's choice is his or her best choice, given the other players' choices
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payoff matrix
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a table that describes the payoffs in a game for each possible combination of strategies
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prisoner's dilemma
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a game in which each player has a dominant strategy, and when each plays it, the resulting payoffs are smaller than if each had played a dominated strategy
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repeated prisoner's dilemma
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a standard prisoner's dilemma that confronts the same players repeatedly
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tit-for-tat
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a strategy for the repeated prisoner's dilemma in which players cooperate on the first move and then mimic their partner's last move on each successive move
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