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Pure monopoly
A firm that satisfies the following conditions:
- It is the only supplier in the market.
- There is no close substitute to the output good.
- There is no threat of competition.
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Natural monopoly
A firm with such extreme economies of scale that once it begins creating a certain level of output, it can produce more at a lower cost than any smaller competitor. Generally characterized by a declining average cost curve.
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Economies of scale
Savings acquired through increases in quantity produced. Oftentimes, large firms in industries with high fixed costs can take advantage of savings that smaller firms cannot.
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Price taker
An agent who takes prices as given. For instance, a firm who faces a perfectly flat demand curve has no choice but to sell at one price. This firm is a price taker.
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Perfect competition
A market operates under perfect competition if it satisfies the following conditions:
- Numerous firms
- Freedom of entry and exit
- Homogeneous output
- Perfect information
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Deadweight loss
The dollar amount of social surplus that goes unrealized as compared to the socially optimal solution.
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Price setter
The opposite of a price taker; a price setter has the power to set prices. For instance, a firm who faces a downward sloping demand curve can choose price.
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Socially optimal
Describes points at which social surplus is maximized, social surplus being the combined utilities of the firms and the public.
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Oligopoly
A market dominated by a small number of firms. At least several of these firms are large enough to influence the market price.
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Duopoly
A market dominated by two firms. Both firms are large enough to influence the market price.
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Cournot duopoly
A model of duopolies under which two firms simultaneously choose the quantity to produce.
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Stackelberg duopoly
A model of duopolies under which two firms choose the quantity to produce with one firm choosing before the other in an observable manner.
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Bertrand duopoly
A model of duopolies under which two firms simultaneously choose the price for a good.
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Cartel
A small number of independent firms who act together to set monopoly prices and make monopoly profits.
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Public information
Information known to everyone.
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Reaction curve
A reaction curve is a function that takes as input the moves of the other players and returns the optimal move given the other players' moves.
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Nash equilibrium
An equilibrium in which all players are playing their best responses to everyone else's best response.
