Unit 7 Terms - Economics
Terms in this set (23)
The characteristics of a market organisation that determine the behavior of ﬁrms within an industry.
One of the four market structures, with the following characteristics: a large number of small ﬁrms; no control over price; all ﬁrms sell a homogeneous product; no barriers to entry, perfect information and perfect resource mobility. Examples include agricultural commodity markets and the foreign exchange market.
A product that is completely standardized and not differentiated; is characteristic of products in perfect competition.
Free entry and exit
The condition in which ﬁrms face no barriers to entering or exiting an industry, characteristic of the market structures of perfect competition and monopolistic competition.
A ﬁrm that accepts a price at which it sells its product. Usually refers to ﬁrms in perfect competition, which being small and numerous have no control over price, and therefore accept the price determined in the market; may also be used to refer to ﬁrms in oligopoly that practice tacit collusion and accept a price set by a price leader (see price leadership)
The price at which a ﬁrm that is making losses and will stop producing in the short run. In perfect competition, it is given by price = minimum average variable cost. (If price is greater than average variable cost, the ﬁrm will go on producing in the short run even if it is making a loss.)
One of the four market structures, with the following characteristics: a single or dominant large ﬁrm in the industry; signiﬁcant control over price; produces and sells a unique product with no close substitutes; high barriers to entry into the industry. Examples include telephone, water and electricity companies in areas where they operate as a single supplier.
Barrier to entry
Anything that can prevent a ﬁrm from entering an industry and beginning production, as a result limiting the degree of competition in the industry.
A single ﬁrm (a monopoly) that can produce for the entire market at a lower average cost than two or more smaller ﬁrms. This happens when the market demand for the monopolist's product is within the range of falling long-run average cost, where there are economies of scale.
One of the four market structures, with the following characteristics: a large number of ﬁrms; substantial control over market price; product differentiation; no barriers to entry. Examples include the shoe, clothing, detergent, computer, publishing, furniture and restaurant industries.
Occurs when each ﬁrm in an industry tries to make its product different from those of its competitors; usually in order to create some monopoly power; products can be differentiated by physical differences, quality differences, location, services, and product image.
One of the four market structures, with the following characteristics: small number of large ﬁrms in the industry; ﬁrms have signiﬁcant control over price; ﬁrms are interdependent; products may be differentiated or homogeneous; there are high barriers to entry. Examples include the car industry, airlines, electrical appliances (differentiated products) and the steel, aluminium, copper, cement industries (homogeneous products).
A problem in game theory showing that in some situations, although it is in the best interests of decision-makers to co-operate, when each actor acts in his/her best interests there results an outcome where they are all worse off. Is often used to illustrate the strategic interdependence of oligopolistic ﬁrms.
Characteristic of oligopolies, refers to the mutual interdependence of ﬁrms and their strategic behavior (planning their actions based on guesses about what their rivals will do), in view of the expectation that what happens to the proﬁts of one ﬁrm depends on the strategies adopted by the other ﬁrms.
Competitive price-cutting by ﬁrms; usually in oligopoly. As each one tries to capture market shares from rival ﬁrms; results in lower proﬁts for ﬁrms.
A measure of how much an industry's production is concentrated among the industry's largest ﬁrms; it measures the percentage of output produced by the largest ﬁrms in an industry, and is used to provide an indication of the degree of competition or degree of monopoly power in an industry. The higher the ratio, the greater the degree of monopoly power.
A formal agreement between ﬁrms in an industry to undertake concerted actions to limit competition; is formed in connection with collusive oligopoly. It may involve ﬁxing the quantity to be produced by each ﬁrm, or ﬁxing the price at which output can be sold, and other actions. The objective is to increase the monopoly power of the ﬁrms in the cartel. Cartels are illegal in many countries.
Formal collusion (open collusion)
An agreement between ﬁrms (usually in oligopoly) to limit output or ﬁx prices, in order to restrict competition; is likely to involve the formation of a cartel. Also known as 'open collusion'.
A type of tacit (or informal) collusion among oligopolistic ﬁrms, where a dominant ﬁrm in the industry (which may be the largest, or the one with lowest costs) sets a price and also initiates any price changes; the remaining ﬁrms in the industry become price-takers, accepting the price that has been established by the leader. Under price leadership price changes tend to be infrequent, and are undertaken by the leader only when major demand or cost changes occur.
A type of oligopoly where ﬁrms do not make agreements among themselves (i.e. do not collude) in order to ﬁx prices or collaborate in some way. See the kinked demand curve, one of the better-known models of non-collusive oligopoly
Kinked demand curve
A model developed to explain price inﬂexibility of oligopolistic rms that do not collude (do not agree to collaborate in order to limit competition between them).
The practice of charging a different price for the same product when the price difference is not justiﬁed by differences in costs of production.
Third-degree price discrimination
Occurs when a ﬁrm price discriminates (i.e. changes different prices that are not justiﬁed by difference in costs) among different consumer groups; is based on the principle that different consumer groups have different price elasticities of demand (PED) for a product, so that higher prices are charged to consumers with a lower PED and lower prices to consumers with a higher PED.