Economics

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Average Total Cost

In economics, average total cost (ATC) equals total fixed and variable costs divided by total units produced. Average total cost curve is typically U-shaped i.e. it decreases, bottoms out and then rises.

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Game Theory

In economics, game theory is the study of interaction between different participants in a market. The objective of game theory is to identify the optimal strategy for each participant.

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Prisoners' Dilemma

A prisoners’ dilemma refers to a type of economic game in which the Nash equilibrium is such that both players are worse off even though they both select their optimal strategies.

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Nash Equilibrium

Nash equilibrium is an outcome of a game such that no player can gain by unilaterally changing its strategy. It is achieved when each player adopts the optimal strategy given the strategy of the other player.

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Dominated Strategy

A dominated strategy is a strategy which doesn’t result in the optimal outcome in any case. A strategy is dominated if there always exist a course of action which results in higher payoff no matter what the opponent does.

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Dominant Strategy

In game theory, a dominant strategy is the course of action that results in the highest payoff for a player regardless of what the other player does.

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Payoff Matrix

In game theory, a payoff matrix is a table in which strategies of one player are listed in rows and those of the other player in columns and the cells show payoffs to each player such that the payoff of the row player is listed first.

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Kinked Demand Curve Model

The kinked-demand curve model (also called Sweezy model) posits that price rigidity exists in an oligopoly because an oligopolistic firm faces a kinked demand curve, a demand curve in which the segment above the market price is relatively more elastic than the segment below it.

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Monopolistic Competition

Monopolistic competition is a type of imperfect competition market structure in which a large number of firms produce differentiated products and there are no barriers to entry.

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Concentration Ratio

Concentration ratio (also called n-firm concentration ratio) measures the market share of top n firms in an industry. Four-firm concentration ratio which is the sum of market share of top four firms, is the most common concentration ratio. It is close to 0 in case of perfect competition and close to 1 in monopoly or oligopoly.

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Oligopoly Models

An oligopoly is a market structure characterized by significant interdependence. Common models that explain oligopoly output and pricing decisions include cartel model, Cournot model, Stackelberg model, Bertrand model and contestable market theory.

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Cournot Model

Cournot model is an oligopoly model in which firms producing identical products compete by setting their output under the assumption that its competitors do not change their output in response.

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Oligopoly

An oligopoly is a market structure in which a few firms have each such a large market share that any change in output by one firm changes market price and profit of other firms. A member of an oligopoly is called an oligopolist.

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Third-Degree Price Discrimination

Third-degree price discrimination is the most common type of price discrimination because classifying customers into a few groups is easier for a firm than knowing the reservation price, the maximum amount that consumers are willing to pay, of each unit of its output.

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Second-Degree Price Discrimination

Second-degree price discrimination (also called nonlinear price discrimination) occurs when a firm charges different prices for different quantities of the product.

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First-Degree Price Discrimination

First-degree price discrimination (also called perfect price discrimination) occurs when a producer charges each consumer his reservation price, the maximum amount that he is willing to pay, for each unit.

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Monopoly Pricing

A monopolist should set its price such that the difference between the price and marginal cost as a percentage of price equals the inverse of the elasticity of demand of its product.

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Monopoly Price and Output

A monopoly can maximize its profit by producing at an output level at which its marginal revenue is equal to its marginal cost.

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Monopoly Power

Monopoly power (also called market power) refers to a firm’s ability to charge a price higher than its marginal cost. Monopoly power typically exists where the there is low elasticity of demand and significant barriers to entry.

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Monopoly

In economics, a monopoly is a market structure where only a single firm supplies a product which has no close substitutes. A firm which has a monopoly is called a monopolist.

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Lerner Index

Lerner index is a measure of monopoly power which equals the markup over marginal cost as percentage of price. Its value ranges from 0, in case of a perfect competition, to 1, in case of a pure monopoly.

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