Unit 7 Terms – Economics

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Market structure

The characteristics of a market organisation that determine the behavior of firms within an industry.

Perfect competition

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.

Homogenous products

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)

Shut-down price

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.

Natural monopoly

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.

Monopolistic competition

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.

Product differentiation

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).

Prisoner’s dilemma

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.

Strategic interdependence

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.

Price war

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.

Concentration ratio

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’.

Price leadership

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.

Non-collusive oligopoly

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).

Price discrimination

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.

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