Competitive markets and perfect competition

Price taker
a firm has to accept the price ruling in the market
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all products are the same irrespective of who makes them
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Allocative efficiency
the optimum allocation of scarce resources that best accords with the consumers' pattern of demand
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Optimum output
the (optimum) combination of fixed and variable factors that minimise ATC
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static efficiency
efficiency at a point in time - includes allocative and productive efficiency
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dynamic efficiency
efficiency over time - new products, techniques and processes which increases economic growth
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Structural performance and conduct model
individual performance depends ultimately on the industry structure where the variables in the model are structure, conduct and performance
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Barriers to entry
obstacles that stop new firms entering a market
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sometimes called organisational slack, not reducing costs to their lowest level - the gap between the actual and lowest possible cost
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Patent laws
a grant of temporary monopoly rights over a new product
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ownership of rights, e.g. to a book, law against copying the book
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taking a firm/ industry into public ownership - ownership by the state
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existing firms in the industry
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limit pricing
setting a price so low that other firms will not enter the industry
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sunk costs
irretrievable costs that occur when a firm exits an industry
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legal monopoly
a firm with 25% or more of the market share
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product differentiation
a way of distinguishing a product from that of competitors
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Marginal cost pricing
setting price at the level of marginal cost
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Average cost pricing
setting price at the level of average cost
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Dead-weight loss
reduction in consumer and producer surplus when output is restricted to less than the optimal level
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Price discrimination
where an identical g/s is sold to different customers at different prices for no reasons not associated with costs
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first degree price discimination
when the discriminating firm can charge a separate price to each individual customer
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Second degree price discrimination
when the discriminating firm can charge a separate price to different groups of customer
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third degree price discrimination
when the discriminating firm can charge a different price in each country
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where a few large firms have the majority of the market share
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Concentration ratio
the proportion of the market share held by the dominant firms
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predatory pricing
setting a price that may bankrupt a competitor firm in order to try to take it over
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combining with other firms
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where actions by one firm will have an effect on the sales and revenue of other large firms in the market
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price war
where firms competitively lower prices to increase their market share
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Reactive behaviour
the actions taken by firms in response to a change in behaviour of a competitor
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Kinked demand curve
a theoretical approach that endevours to analyse the reasons for price stability in oligopoly
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brand loyalty
a measure indicating the degree to which consumers will purchase a firm's product rather than a competing firms products
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discontinuous marginal revenue curve
region over which a change in marginal costs will not lead to a change in the firm's price and output levels
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game theory
an analysis of how game players react to changing circumstances and plan their response
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zero sum game
where a gain by one player is matched by a loss by another player
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risk averse
where one party does not take any action that might promote retaliatory activity by another party
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where firms cooporate in their pricing and output policies
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Prisoner's Dilemma
where prisoners both choose the worst option
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Nash equilibrium
where the optimum strategy is to maintain current behaviour
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restrictive agreements
where firms collude to indulge in anti-competitive policy
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joint profits
where firms agree to maximise shared rather than individual profits
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a group of firms working together
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price leader
a firm that establishes the market price that all other firms in the agreement follow
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barometric price leadership
a firm whose price changes are accepted as they are clever at interpreting market conditions
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parallel pricing
where firms charge identical prices
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Tacit collusion
where firms have reached an agreement as to each other's behaviour as a result of repeated observations over time
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menu costs
the time and money spent by firms in changing their prices in line with inflation
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Other cards in this set

Card 2




all products are the same irrespective of who makes them

Card 3


Allocative efficiency


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Card 4


Optimum output


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Card 5


static efficiency


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