| Adverse Selection | Situation where individuals have hidden characteristics and in which a selection process results in a pool of individuals with undesirable characteristics.
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| Affiliated (Or Correlated) Value Estimates | Auction environment in which bidders do not know their own valuation of the item or the valuations of others. Each bidder uses his or her own information to estimate their valuation, and these value estimates are affiliated: The higher a bidder's value estimate, the more likely it is that other bidders also have high value estimates.
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| Antitrust Policy | Government policies designed to keep firms from monopolizing their markets.
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| Asymmetric Information | A situation that exists when some people have better information than others.
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| Average Fixed Cost | Fixed costs divided by the number of units of output.
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| Average Product | A measure of the output produced per unit of input.
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| Average Variable Cost | Variable costs divided by the number of units of output.
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| Bertrand Oligopoly | An industry in which (1) there are few firms serving many consumers; (2) firms produce identical products at a constant marginal cost; (3) firms compete in price and react optimally to competitors' prices;
(4) consumers have perfect information and there are no transaction costs; and (5) barriers to entry exist.
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| Best-Response (Or Reaction) Function | A function that defines the profit-maximizing level of output for a firm for given output levels of another firm.
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| Block Pricing | Pricing strategy in which identical products are packaged together in order to enhance profits by forcing customers to make an all-or-none decision to purchase.
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| Brand Equity | The additional value added to a product because of its brand.
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| Budget Line | The bundles of goods that exhaust a consumer's income.
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| Budget Set | The bundles of goods a consumer can afford.
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| Change In Demand | Changes in variables other than the price of a good, such as income or the price of another good, lead to a change in demand. This corresponds to a shift of the entire demand curve.
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| Change In Quantity Demanded | Changes in the price of a good lead to a change in the quantity demanded of that good. This corresponds to a movement along a given demand curve.
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| Change In Quantity Supplied | Changes in the price of a good lead to a change in the quantity supplied of that good. This corresponds to a movement along a given supply curve.
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| Change In Supply | Changes in variables other than the price of a good, such as input prices or technological advances, lead to a change in supply. This corresponds to a shift of the entire supply curve.
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| Cobb-Douglas Production Function | A production function that assumes some degree of substitutability among inputs.
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| Commodity Bundling | The practice of bundling several different products together and selling them at a single "bundle price."
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| Common Value | Auction environment in which the true value of the item is the same for all bidders, but this common value is unknown. Bidders each use their own (private) information to form an estimate of the item's true common value.
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| Comparative Advertising | A form of advertising where a firm attempts to increase the demand for its brand by differentiating its product from competing brands.
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| Complements | Goods for which an increase (decrease) in the price of one good leads to a decrease (increase) in the demand for the other good.
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| Constant Returns To Scale | Exist when long-run average costs remain constant as output is increased.
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| Consumer Equilibrium | The equilibrium consumption bundle is the affordable bundle that yields the greatest satisfaction to the consumer.
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| Consumer Surplus | The value consumers get from a good but do not have to pay for.
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| Contestable Market | A market in which (1) all firms have access to the same technology; (2) consumers respond quickly to price changes; (3) existing firms cannot respond quickly to entry by lowering their prices; and (4) there are no sunk costs.
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| Contract | A formal relationship between a buyer and seller that obligates the buyer and seller to exchange at terms specified in a legal document.
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| Cost Complementarity | When the marginal cost of producing one type of output decreases when the output of another good is increased.
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| Cournot Equilibrium | A situation in which neither firm has an incentive to change its output given the other firm's output.
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| Cournot Oligopoly | An industry in which (1) there are few firms serving many consumers; (2) firms produce either differentiated or homogeneous products; (3) each firm believes rivals will hold their output constant if it changes its output; and (4) barriers to entry exist.
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| Cross-Price Elasticity | A measure of the responsiveness of the demand for a good to changes in the price of a related good; the percentage change in the quantity demanded of one good divided by the percentage change in the price of a related good.
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| Cross-Subsidy | Pricing strategy in which profits gained from the sale of one product are used to subsidize sales of a related product.
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| Cubic Cost Function | Costs are a cubic function of output; provides a reasonable approximation to virtually any cost function.
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| Dansby-Willig Performance Index | Ranks industries according to how much social welfare would improve if the output in an industry were increased by a small amount.
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| Deadweight Loss Of Monopoly | The consumer and producer surplus that is lost due to the monopolist charging a price in excess of marginal cost.
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| Decreasing (Diminishing) Marginal Returns | Range of input usage over which marginal product declines.
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| Demand Function | A function that describes how much of a good will be purchased at alternative prices of that good and related goods, alternative income levels, and alternative values of other variables affecting demand.
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| Direct Network Externality | The direct value enjoyed by the user of a network because others also use the network.
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| Diseconomies Of Scale | Exist whenever long-run average costs increase as output increases.
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| Dominant Strategy | A strategy that results in the highest payoff to a player regardless of the opponent's action.
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| Dutch Auction | A descending sequential-bid auction in which the auctioneer begins with a high asking price and gradually reduces the asking price until one bidder announces a willingness to pay that price for the item.
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| Economic Profits | The difference between total revenue and total opportunity cost.
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| Economics | The science of making decisions in the presence of scarce resources.
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| Economies Of Scale | Exist whenever long-run average costs decline as output increases.
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| Economies Of Scope | Exist when the total cost of producing two products within the same firm is lower than when the products are produced by separate firms.
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| Elastic Demand | Demand is elastic if the absolute value of the own price elasticity is greater than 1.
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| Elasticity | A measure of the responsiveness of one variable to changes in another variable; the percentage change in one variable that arises due to a given percentage change in another variable.
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| English Auction | An ascending sequential-bid auction in which bidders observe the bids of others and decide whether or not to increase the bid. The auction ends when a single bidder remains; this bidder obtains the item and pays the auctioneer the amount of the bid.
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| Extensive-Form Game | A representation of a game that summarizes the players, the information available to them at each stage, the strategies available to them, the sequence of moves, and the payoffs resulting from alternative strategies.
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| Firm Demand Curve | The demand curve for an individual firm's product; in a perfectly competitive market, it is simply the market price.
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| First-Price, Sealed-Bid Auction | A simultaneous-move auction in which bidders simultaneously submit bids on pieces of paper. The auctioneer awards the item to the high bidder, who pays the amount bid.
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| Fixed And Variable Factors Of Production | Fixed factors are the inputs the manager cannot adjust in the short run. Variable factors are the inputs a manager can adjust to alter production.
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| Fixed Costs | Costs that do not change with changes in output; include the costs of fixed inputs used in production.
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| Four-Firm Concentration Ratio | The fraction of total industry sales generated by the four largest firms in the industry.
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| Full Economic Price | The dollar amount paid to a firm under a price ceiling, plus the nonpecuniary price.
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| Green Marketing | A form of niche marketing where firms target products toward consumers who are concerned about environmental issues.
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| Herfindahl-Hirschman Index (HHI) | The sum of the squared market shares of firms in a given industry multiplied by 10,000.
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| Hidden Action | Action taken by one party in a relationship that cannot be observed by the other party.
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| Hidden Characteristics | Things one party to a transaction knows about itself but which are unknown by the other party.
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| Income Effect | The movement from one indifference curve to another that results from the change in real income caused by a price change.
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| Income Elasticity | A measure of the responsiveness of the demand for a good to changes in consumer income; the percentage change in quantity demanded divided by the percentage change in income.
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| Increasing Marginal Returns | Range of input usage over which marginal product increases.
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| Incremental Costs | The additional costs that stem from a yes-or-no decision.
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| Incremental Revenues | The additional revenues that stem from a yes-or-no decision.
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| Independent Private Values | Auction environment in which each bidder knows his own valuation of the item but does not know other bidders' valuations, and in which each bidder's valuation does not depend on other bidders' valuations of the object.
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| Indifference Curve | A curve that defines the combinations of two goods that give a consumer the same level of satisfaction.
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| Indirect Network Externality (Network Comple-Mentarities) | The indirect value enjoyed by the user of a network because of complementarities between the size of a network and the availability of complementary products or services.
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| Inelastic Demand | Demand is inelastic if the absolute value of the own price elasticity is less than 1.
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| Inferior Good | A good for which an increase (decrease) in income leads to a decrease (increase) in the demand for that good.
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| Infinitely Repeated Game | A game that is played over and over again forever and in which players receive payoffs during each play of the game.
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| Isocost Line | A line that represents the combinations of inputs that will cost the producer the same amount of money.
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| Isoprofit Curve | A function that defines the combinations of outputs produced by all firms that yield a given firm the same level of profits.
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| Isoquant | Defines the combinations of inputs that yield the same level of output.
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| Law Of Diminishing Marginal Rate Of Technical Substitution | A property of a production function stating that as less of one input is used, increasing amounts of another input must be employed to produce the same level of output.
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| Learning Curve Effects | When a firm enjoys lower costs due to knowledge gained from its past production decisions.
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| Least Squares Regression | The line that minimizes the sum of squared deviations between the line and the actual data points.
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| Leontief Production Function | A production function that assumes that inputs are used in fixed proportions.
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| Lerner Index | A measure of the difference between price and marginal cost as a fraction of the product's price.
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| Limit Pricing | Strategy where an incumbent maintains a price below the monopoly level in order to prevent entry.
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| Linear Demand Function | A representation of the demand function in which the demand for a given good is a linear function of prices, income levels, and other variables influencing demand.
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| Linear Production Function | A production function that assumes a perfect linear relationship between all inputs and total output.
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| Linear Supply Function | A representation of the supply function in which the supply of a given good is a linear function of prices and other variables affecting supply.
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| Log-Linear Demand | Demand is log-linear if the logarithm of demand is a linear function of the logarithms of prices, income, and other variables.
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| Long-Run Average Cost Curve | A curve that defines the minimum average cost of producing alternative levels of output, allowing for optimal selection of both fixed and variable factors of production.
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| Lump-Sum Tariff | A fixed fee that an importing firm must pay the domestic government in order to have the legal right to sell the product in the domestic market.
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| Manager | A person who directs resources to achieve a stated goal.
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| Managerial Economics | The study of how to direct scarce resources in the way that most efficiently achieves a managerial goal.
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| Marginal (Incremental) Cost | The cost of producing an additional unit of output.
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| Marginal Benefit | The change in total benefits arising from a change in the managerial control variable, Q.
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| Marginal Cost | The change in total costs arising from a change in the managerial control variable, Q.
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| Marginal Product | The change in total output attributable to the last unit of an input.
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| Marginal Rate Of Substitution (MRS) | The rate at which a consumer is willing to substitute one good for another good and still maintain the same level of satisfaction.
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| Marginal Rate Of Technical Substitution (MRTS) | The rate at which a producer can substitute between two inputs and maintain the same level of output.
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| Marginal Revenue | The change in revenue attributable to the last unit of output; for a competitive firm, MR is the market price.
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| Market Demand Curve | A curve indicating the total quantity of a good all consumers are willing and able to purchase at each possible price, holding the prices of related goods, income, advertising, and other variables constant.
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| Market Power | The ability of a firm to set its price above marginal cost.
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| Market Rate Of Substitution | The rate at which one good may be traded for another in the market; slope of the budget line.
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| Market Structure | Factors that affect managerial decisions, including the number of firms competing in a market, the relative size of firms, technological and cost considerations, demand conditions, and the ease with which firms can enter or exit the industry.
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| Market Supply Curve | A curve indicating the total quantity of a good that all producers in a competitive market would produce at each price, holding input prices, technology, and other variables affecting supply constant.
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| Mean (Expected Value) | The sum of the probabilities that different outcomes will occur multiplied by the resulting payoffs.
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| Mixed (Randomized) Strategy | A strategy whereby a player randomizes over two or more available actions in order to keep rivals from being able to predict his or her action.
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| Monopolistically Competitive Market | A market in which (1) there are many buyers and sellers; (2) each firm produces a differentiated product; and (3) there is free entry and exit.
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| Monopoly | A market structure in which a single firm serves an entire market for a good that has no close substitutes.
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| Moral Hazard | Situation where one party to a contract takes a hidden action that benefits him or her at the expense of another party.
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| Multiproduct Cost Function | A function that defines the cost of producing given levels of two or more types of outputs assuming all inputs are used efficiently.
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| Nash Equilibrium | A condition describing a set of strategies in which no player can improve her payoff by unilaterally changing her own strategy, given the other players' strategies.
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| Negative Externalities | Costs borne by parties who are not involved in the production or consumption of a good.
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| Negative Marginal Returns | Range of input usage over which marginal product is negative.
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| Net Present Value | The present value of the income stream generated by a project minus the current cost of the project.
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| Niche Marketing | A marketing strategy where goods and services are tailored to meet the needs of a particular segment of the market.
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| Nonexclusionary Consumption | A good or service is nonexclusionary if, once provided, no one can be excluded from consuming it.
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| Nonrival Consumption | A good is nonrival in consumption if the consumption of the good by one person does not preclude other people from also consuming the good.
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| Normal Good | A good for which an increase (decrease) in income leads to an increase (decrease) in the demand for that good.
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| Normal-Form Game | A representation of a game indicating the players, their possible strategies, and the payoffs resulting from alternative strategies.
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| Oligopoly | A market structure in which there are only a few firms, each of which is large relative to the total industry.
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| Opportunity Cost | The cost of the explicit and implicit resources that are forgone when a decision
is made.
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| Own Price Elasticity | A measure of the responsiveness of the quantity demanded of a good to a change in the price of that good; the percentage change in quantity demanded divided by the percentage change in the price of the good.
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| Peak-Load Pricing | Pricing strategy in which higher prices are charged during peak hours than during off-peak hours.
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| Penetration Pricing | Charging a low price initially to penetrate a market and gain a critical mass of customers; useful when strong network effects are present.
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| Perfectly Competitive Market | A market in which (1) there are many buyers and sellers; (2) each firm produces a homogeneous product; (3) buyers and sellers have perfect information;
(4) there are no transaction costs; and (5) there is free entry and exit.
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| Perfectly Elastic Demand | Demand is perfectly elastic if the own price elasticity is infinite in absolute value. In this case the demand curve is horizontal.
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| Perfectly Inelastic Demand | Demand is perfectly inelastic if the own price elasticity is zero. In this case the demand curve is vertical.
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| Per-Unit (Or Excise) Tariff | The fee an importing firm must pay to the domestic government on each unit it brings into the country.
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| Predatory Pricing | Strategy where a firm temporarily prices below its marginal cost to drive competitors out of the market.
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| Present Value | The amount that would have to be invested today at the prevailing interest rate to generate the given future value.
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| Price Ceiling | The maximum legal price that can be charged in a market.
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| Price Discrimination | The practice of charging different prices to consumers for the same good or service.
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| Price Floor | The minimum legal price that can be charged in a market.
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| Price Matching | A strategy in which a firm advertises a price and a promise to match any lower price offered by a competitor.
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| Price–Cost Squeeze | Tactic used by a vertically integrated firm to squeeze the margins of its competitors.
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| Producer Surplus | The amount producers receive in excess of the amount necessary to induce them to produce the good.
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| Production Function | A function that defines the maximum amount of output that can be produced with a given set of inputs.
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| Profit Sharing | Mechanism used to enhance workers' efforts that involves tying compensation to the underlying profitability of the firm.
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| Public Good | A good that is nonrival and nonexclusionary in consumption.
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| Quota | A restriction that limits the quantity of imported goods that can legally enter the country.
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| Raising Rivals' Costs | Strategy in which a firm gains an advantage over competitors by increasing their costs.
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| Randomized Pricing | Pricing strategy in which a firm intentionally varies its price in an attempt to "hide" price information from consumers and rivals.
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| Relationship-Specific Exchange | A type of exchange that occurs when the parties to a transaction have made specialized investments.
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| Rent Seeking | Selfishly motivated efforts to influence another party's decision.
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| Reservation Price | The price at which a consumer is indifferent between purchasing at that price and searching for a lower price.
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| Revenue Sharing | Mechanism used to enhance workers' efforts that involves linking compensation to the underlying revenues of the firm.
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| Risk Averse | Preferring a sure amount of $M to a risky prospect with an expected value of $M.
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| Risk Loving | Preferring a risky prospect with an expected value of $M to a sure amount of $M.
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| Risk Neutral | Indifferent between a risky prospect with an expected value of $M and a sure amount of $M.
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| Rothschild Index | A measure of the sensitivity to price of a product group as a whole relative to the sensitivity of the quantity demanded of a single firm to a change in its price.
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| Screening | An attempt by an uninformed party to sort individuals according to their characteristics.
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| Second-Price, Sealed-Bid Auction | A simultaneous-move auction in which bidders simultaneously submit bids. The auctioneer awards the item to the high bidder, who pays the amount bid by the second-highest bidder.
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| Secure Strategy | A strategy that guarantees the highest payoff given the worst possible scenario.
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| Self-Selection Device | A mechanism in which informed parties are presented with a set of options, and the options they choose reveal
their hidden characteristics to an uninformed party.
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| Sequential-Move Game | Game in which one player makes a move after observing the other player's move.
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| Short-Run Cost Function | A function that defines the minimum possible cost of producing each output level when variable factors are employed in the cost-minimizing fashion.
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| Signaling | An attempt by an informed party to send an observable indicator of his or her hidden characteristics to an uninformed party.
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| Simultaneous-Move Game | Game in which each player makes decisions without knowledge of the other players' decisions.
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| Specialized Investment | An expenditure that must be made to allow two parties to exchange but has little or no value in any alternative use.
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| Spot Exchange | An informal relationship between a buyer and seller in which neither party is obligated to adhere to specific terms for exchange.
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| Stackelberg Oligopoly | An industry in which (1) there are few firms serving many consumers; (2) firms produce either differentiated or homogeneous products; (3) a single firm (the leader) chooses an output before rivals select their outputs; (4) all other firms (the followers) take the leader's output as given and select outputs that maximize profits given the leader's output; and
(5) barriers to entry exist.
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| Standard Deviation | The square root of the variance.
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| Strategy | In game theory, a decision rule that describes the actions a player will take at each decision point.
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| Subgame Perfect Equilibrium | A condition describing a set of strategies that constitutes a Nash equilibrium and allows no player to improve his own payoff at any stage of the game by changing strategies.
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| Substitutes | Goods for which an increase (decrease) in the price of one good leads to an increase (decrease) in the demand for the other good.
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| Substitution Effect | The movement along a given indifference curve that results from a change in the relative prices of goods, holding real income constant.
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| Sunk Cost | A cost that is forever lost after it has been paid
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| Supply Function | A function that describes how much of a good will be produced at alternative prices of that good, alternative input prices, and alternative values of other variables affecting supply.
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| Sweezy Oligopoly | An industry in which (1) there are few firms serving many consumers; (2) firms produce differentiated products; (3) each firm believes rivals will respond to a price reduction but will not follow a price increase; and
(4) barriers to entry exist.
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| Total Product | The maximum level of output that can be produced with a given amount of inputs.
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| Transaction Costs | Costs associated with acquiring an input that are in excess of the amount paid to the input supplier.
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| Transfer Pricing | Pricing strategy in which a firm optimally sets the internal price at which an upstream division sells an input to a downstream division.
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| Trigger Strategy | A strategy that is contingent on the past play of a game and in which some particular past action "triggers" a different action by a player.
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| T-Statistic | The ratio of the value of a parameter estimate to the standard error of the parameter estimate.
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| Two-Part Pricing | Pricing strategy in which consumers are charged a fixed fee for the right to purchase a product, plus a per-unit charge for each unit purchased.
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| Unitary Elastic Demand | Demand is unitary elastic if the absolute value of the own price elasticity is equal to 1.
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| Value Marginal Product | The value of the output produced by the last unit of an input.
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| Variable Costs | Costs that change with changes in output; include the costs of inputs that vary with output.
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| Variance | The sum of the probabilities that different outcomes will occur multiplied by the squared deviations from the mean of the random variable.
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| Vertical Foreclosure | Strategy wherein a vertically integrated firm charges downstream rivals a prohibitive price for an essential input, thus forcing rivals to use more costly substitutes or go out of business.
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| Vertical Integration | A situation where a firm produces the inputs required to make its final product.
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| Winner's Curse | The "bad news" conveyed to the winner that his or her estimate of the item's value exceeds the estimates of all other bidders.
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