Cheatography
https://cheatography.com
Covering price discrimination, monopolistic competition and advertising, oligopoly and strategic behavior, consumer decision-making, and behavioral economics and risk-taking
This is a draft cheat sheet. It is a work in progress and is not finished yet.
Price Discrimination
Definitions |
price discrimination |
the practice of selling the same good or service at different prices to different groups of customers |
perfect price discrimination |
the practice of selling the same good or service at a unique price to every customer (set at their max willingness to pay) |
First Degree Price Discrimination |
perfect price discrimination where the firm will charge a person based on their exact willingness to pay |
Second Degree Price Discrimination |
Firms will offer discounts based on bulk purchasing |
Third Degree Price Discrimination |
Firms will charge different prices based on differences in price elasticity of demand (ex. movie theatre concessions or student discounts) |
Relationships |
Conditions for Price Discrimination |
distinguishing groups of buyers with different price elasticities of demand, preventing resale, |
Monopolistic Competition and Advertising
Definitions |
Monopolistic Competition |
a type of market structure characterized by low barriers to entry, many different firms, and product differentiation |
Product Differentiation |
the process firms use to make a product more attractive to potential customers |
Markup |
the difference between the price the firm charges and the marginal cost of production |
Excess Capacity |
phenomenon occurring when a firm produces at an output level smaller than the output level needed to minimize average total costs |
Relationships |
in monopolistically competitive industries... |
- economic profits are zero and are the same as perfectly competitive markets |
- MR < Price |
- price is more likely to be higher than perfectly competitive industries because of the cost of variety |
- it is inefficient because price does not equal minimum ATC |
- long run equilibrium, Price = ATC, Price > MC |
Monopolistic competition characteristics |
low barriers to entry, many different firms, and product differentiation |
production differentiation in... |
style or type, location, and quality |
Oligopoly and Strategic Behavior
Definitions |
Oligopoly |
a form of market structure that exists when a small number of firms sell a differentiated product in a market with high barriers to entry |
Collusion |
an agreement among rival firms that specifies the price each firm charges and the quantity it produces |
Cartel |
a group of two or more firms that act in unison |
Antitrust Laws |
laws that attempt to prevent collusion (that is, prevent oligopolies from behaving like monopolies) |
Mutual Independence |
a market situation where the actions of one firm have an impact on the price and output of its competitors |
Price Leadership |
phenomenon occurring when a dominant firm in an industry sets the price that maximizes its profits and the smaller firms in the industry follow by setting their prices to match the price leader |
Price Effect |
how a change in price affects the firm's revenue |
Output Effect |
how a change in price affects the number of customers in a market |
Game Theory |
a branch of mathematics that economists use to analyze the strategic behavior of decision-makers |
Prisoner's Dilemma |
a situation in which decision-makers face incentives that make it difficult to achieve mutually beneficial outcomes, when the socially optimal strategy doesn't equal the dominant strategy |
Dominant Strategy |
in game theory, a strategy that a player will always prefer, regardless of what his opponent chooses |
Nash Equilibrium |
a phenomenon occurring when all economic decision-makers opt to keep the status quo (neither player has na incentive to switch their strategy given what the other player is doing) |
Tit-for-Tat |
a long-run strategy that promotes cooperation among participants by mimicking the opponent's most recent decision with repayment in kind |
Backward Induction |
in game theory, the process of deducing backward from the end of a scenario to infer a sequence of optimal actions |
Decision Tree |
diagram that illustrates all of the possible outcomes in a sequential game |
Sherman Antitrust Act |
the first federal law (1890) limiting cartels and monopolies |
Clayton Act |
law of 1914 targeting corporate behaviors that reduce competition |
Predatory Pricing |
the practice of a firm deliberately setting its prices below average variable costs with the intent of driving rivals out of the market |
Network Externality |
condition occurring when the number of customers who purchase or use a product influences the quantity demanded |
Switching Costs |
the costs incurred when a consumer changes from one supplier to another |
Relationships |
Prisoner's dilemma dominant strategy |
rat out your partner to avoid jail time |
Consumer Decision Making
Definitions |
Utility |
a measure of the level of satisfaction that a consumer enjoys from the consumption of goods and services |
Util |
a personal unit of satisfaction used to measure the enjoyment from consumption of a good or service |
Marginal Utility |
the additional satisfaction derived from consuming one more unit of a good or service |
Diminishing Marginal Utility |
condition occurring when marginal utility declines as consumption increases |
Consumer Optimum |
the combination of goods and services that maximizes the consumer's utility for a given income or budget (MU/P is equal across products) |
Substitution Effect |
(1) the decision by laborers to work more hours at higher wages, substituting labor for leisure; (2) a consumer's substitution of a product that has become relatively less expensive as the result of a price change |
Real-income effect |
a change in purchasing power as a result of a change in the price of a good |
Diamond-water paradox |
concept explaining why water, which is essential to life, is inexpensive, while diamonds, which do not sustain life, are expensive |
Indifference Curve |
a graph representing the various combinations of two goods that yield the same level of personal satisfaction, or utility |
Maximization point |
the point at which a certain combination of two goods yields the greatest possible utility |
Budget constraint |
the set of consumption bundles that represent the maximum amount the consumer can afford |
Marginal rate of substitution (MRS) |
the rate at which a consumer is willing to trade one good for another along an indifference curve |
Perfect substitutes |
two goods the consumer is completely indifferent between, resulting in a straight-line indifference curve with a constant marginal rate of substitution |
Perfect complements |
two goods the consumer is interested in consuming in fixed proportions, resulting in a right-angle indifference curve |
Relationships |
if combination of something one loves and something one hates |
maximum utility is gained from purchasing maximum quantity of the thing one loves |
Behavioral Economics and Risk Taking
Definitions |
Behavioral Economics |
the field of economics that draws on insights from experimental psychology to explore how people make economic decisions |
Bounded Rationality |
the concept that although decision-makers want a good outcome, either they are not capable of performing the problem solving that traditional economic theory assumes or they are not inclined to do so; also called limited reasoning |
Gambler's Fallacy |
the belief that recent outcomes are unlikely to be repeated and that outcomes that have not occurred recently are due to happen soon |
Hot Hand Fallacy |
the belief that random sequences exhibit a positive correlation |
Framing Effect |
a phenomenon seen when people change their answer depending on how the question is asked (or change their decision depending on how alternatives are presented) |
Priming Effect |
phenomenon seen when the order of the questions influences the answers |
Status Quo Bias |
condition existing when decision-makers want to keep things the way they are |
Intertemporal Decision-Making |
planning to do something over a period of time, which requires valuing the present and the future consistently |
Ultimatum Game |
an economic experiment in which two players decide how to divide a sum of money |
Risk-Averse People |
those who prefer a sure thing over a gamble with a higher expected value |
Risk-Neutral People |
those who choose the highest expected value regardless of the risk |
Risk-Takers |
those who prefer gambles with lower expected values, and potentially higher winnings, over a sure thing |
Preference Reversal |
phenomenon arising when risk tolerance is not consistent |
Prospect Theory |
a theory suggesting that individuals weigh the utilities and risks of gains and losses differently |
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