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Monopolistic Competition
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Characterized by free entry, many different firms, and product differentiation.
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Product Differentiation
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The process that firms use to make a product more attractive to potential customers.
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Ways of Differentiation
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Style or Type, Location, Quality,
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Markup
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The difference between the price the firm charges and the marginal cost of production.
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Excess Capacity
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When a firm produces at an output level that is smaller than the output level needed to minimize total costs.
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Oligopoly
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When a small number of firms sell a differentiated product in a market with high barriers to entry
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The Nash Equilibrium
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When a economic decision maker has nothing to gain by changing its strategy unless it can collude.
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Price Effect
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When the price of a good or service is affected by the entrance of a rival firm in the market.
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The Prisoners dilemma
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When decision makers face incentives that make it difficult to achieve mutually beneficial outcomes.
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Predatory Pricing
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When firms deliberately set their prices below average variable costs with intent of driving rivals from the market.
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Bandwagon Effect
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When a buyers preference for a product increases as the number of people buying it increases.
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Derived Demand
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the demand for an input used in the production process.
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Marginal Product of Labor
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the change in output when one more worker is added
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Value of the marginal product
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The marginal product of an input multiplied by the price of the output it produces.
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Substitution Effect
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When laborers work more hours at higher wages, substituting labor for leisure.
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Income Effect
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When laborers work fewer hours at higher wages, using their additional income to demand more leisure.
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Outsourcing of labor
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When a firm shifts jobs to an outside company, usually overseas, where the cost of labor is lower.
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Monopsony
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when there is only one buyer
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Economic Rent
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The difference between what a factor of production earns and what its next best alternative could earn.
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