Managerial Economics and Strategy 3e by Perloff, Brander

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Managerial Economics and Strategy 3e by Perloff, Brander is the 3rd edition of the textbook authored by Jeffrey M. Perloff, University of California, Berkeley, and James A. Brander, Sauder School of Business, University of British Columbia, and published in 2020 by Pearson Education, Inc., Hoboken, NJ.

Managerial economics and strategy by Jeffrey M. Perloff James A. Brander (z-lib.org)

  • Adverse selection. When one party to a transaction possesses information about a hidden characteristic that is unknown to other parties and takes economic advantage of this information, causing low-quality items to be overrepresented in transactions.
  • Arc price elasticity. An elasticity that uses the average price and average quantity as the denominator for percentage calculations.
  • Asymmetric information. A situation in which one party to a transaction has relevant information that another party does not have.
  • Auction. A sale in which a good or service is sold to the highest bidder.
  • Average cost (or average total cost, AC). The total cost divided by the units of output produced: AC = C>q.
  • Average fixed cost (AFC). The fixed cost divided by the units of output produced: AFC = F>q.
  • Average product of labor (APL). The ratio of output, q, to the amount of labor, L, used to produce that output: APL = q>L.
  • Average variable cost (or variable cost per unit of output, AVC). The variable cost divided by the units of output produced: AVC = VC>q.
  • Backward induction (in a game). First determine the best response by the last player to move, next determine the best response for the player who made the next-tolast move, and then repeat the process back to the first move of the game.
  • Bad. Something for which less is preferred to more, such as pollution.
  • Bandwagon effect. The situation in which a person places greater value on a good as more and more other people possess it.
  • Bargaining game. Any situation in which two or more parties with different interests or objectives negotiate voluntarily over the terms of some interaction, such as the transfer of a good from one party to another.
  • Behavioral economics. The use of insights from psychology and research on human cognition and emotional biases to augment the rational economic model to better predict economic decision making.
  • Bertrand equilibrium (or Nash-Bertrand, Bertrand-Nash equilibrium). A Nash equilibrium in prices; a set of prices such that, holding the prices of all other firms constant, no firm can obtain a higher profit by choosing a different price.
  • Best response (in a game). The strategy that maximizes a player's payoff given its beliefs about its rivals' strategies.
  • Bounded rationality. A situation in which people have a limited capacity to anticipate, solve complex problems, or enumerate all options.
  • Budget line (or budget constraint). The bundles of goods that can be bought if the entire budget is spent on those goods at given prices.
  • Bundling (or package deal). A type of sale in which two or more goods or services are combined and offered at a single price.
  • Cartel. A group of firms that explicitly agree (collude) to coordinate setting prices or quantities.
  • Certification. A report that a particular product meets or exceeds a given standard.
  • Club good. A good that is nonrival but is subject to exclusion.
  • Common knowledge (in a game). A piece of information known by all players, and is known by all players to be known, and is known to be known to be known, etc.
  • Common property, open-access. Resources to which everyone has free access and equal rights to exploit.
  • Comparative advantage (in international trade). The ability to produce a good or service at lower opportunity cost than other countries.
  • Complements. A pair of goods or services for which an increase in the price of one causes a consumer to demand a smaller quantity of the other.
  • Complete information (in a game). A situation in which the strategies and payoffs of the game are common knowledge.
  • Constant returns to scale (CRS). The property of a production function whereby when all inputs are increased by the same proportion, output increases by that same proportion.
  • Consumer surplus (CS). The monetary difference between what a consumer is willing to pay for the quantity of the good purchased and what the good actually costs.
  • Cost (or total cost, C). The sum of a firm's variable cost and fixed cost: C = VC + F.
  • Cost-benefit principle. A change is desirable if its benefits exceed the costs.
  • Cournot equilibrium (or Nash-Cournot, Cournot-Nash equilibrium). A set of quantities chosen by firms such that, holding the quantities of all other firms constant, no firm can obtain a higher profit by choosing a different quantity.
  • Credible threat. A claim or threat that a player will, under particular circumstances, use a strategy harmful to its rival, and the threat is believable because it is in the player's best interest to use it if those circumstances arise.
  • Cross-price elasticity of demand. The percentage change in the quantity demanded divided by the percentage change in the price of another good.
  • Deadweight loss (DWL). The net reduction in total surplus from a loss of surplus by one group that is not offset by a gain to another group from an action that alters a market equilibrium.
  • Decreasing returns to scale (DRS). The property of a production function whereby output rises less than in proportion to an equal proportional increase in all inputs.
  • Demand curve. A curve showing the quantity of a good demanded at each possible price, holding constant the other factors that influence purchases.
  • Dependent variable. The variable whose variation is to be explained.
  • Diminishing marginal returns (law of diminishing marginal returns]). If a firm keeps increasing an input, holding all other inputs and technology constant, the corresponding increases in output will eventually become smaller (diminish).
  • Diseconomies of scale. The property of a cost function whereby the average cost of production rises when output increases.
  • Dominant strategy. A strategy that produces a higher payoff than any other strategy the player can use no matter what its rivals do.
  • Duopoly. An oligopoly with two firms.
  • Durable good. A product that is usable for a long period, perhaps for many years.
  • Dynamic game. A game in which players move either sequentially or repeatedly.
  • Economically efficient (for a producer). Minimizing the cost of producing a specified output level.
  • Economic profit. Revenue minus opportunity cost.
  • Economics. The study of decision making in the presence of scarcity.
  • Economies of scale. The property of a cost function whereby the average cost of production falls as output expands.
  • Economies of scope. The situation in which it is less expensive to produce goods jointly than separately.
  • Efficient contract. An agreement in which neither party can be made better off without harming the other party.
  • Efficient production (or technological efficiency). The situation in which the current level of output cannot be produced with fewer inputs, given existing knowledge about technology and the organization of production.
  • Elasticity. The percentage change in one variable divided by the associated percentage change in the other variable.
  • Endowment effect. People place a higher value on a good if they own it than if they are considering buying it.
  • Equilibrium. A situation in which no participant wants to change his or her behavior.
  • Essential facility. A scarce resource that a rival needs to use to survive.
  • Excess demand. The amount by which the quantity demanded exceeds the quantity supplied at a specified price.
  • Excess supply. The amount by which the quantity supplied exceeds the quantity demanded at a specified price.
  • Exchange rate. The price of one currency (such as the euro) in terms of another currency (such as the U.S. dollar).
  • Exclusion. The property that others can be prevented from consuming a good.
  • Expected value. Is derived by taking the value of each possible outcome times the probability of that outcome and adding up those values.
  • Explanatory variables. The factors that are thought to affect the value of a dependent variable.
  • Extensive form (of a game). Specifies the n players, the sequence in which they make their moves, the actions they can take at each move, the information that each player has about players' previous moves, and the payoff function over all possible strategies.
  • Externality. A person's well-being or a firm's production capability is directly affected by the actions of other consumers or firms rather than indirectly through changes in prices.
  • Fair bet. A bet with an expected value of zero.
  • Fair insurance. A contract between an insurer and a policyholder in which the expected value of the contract to the policyholder is zero.
  • Fixed cost (F). A production expense that does not vary with output.
  • Fixed input. A factor of production that cannot be varied in the short run.
  • Free-rider problem. A situation in which people benefit from the actions of others without paying.
  • Game. Any interaction between players (such as individuals or firms) in which strategic interdependence plays a major role.
  • Game theory. A set of tools used by economists and others to analyze decision making in situations of strategic interdependence.
  • Good. A commodity for which more is preferred to less, at least at some levels of consumption.
  • Group price discrimination (or third-degree price discrimination). A situation in which a firm charges each group of customers a different price.
  • Hidden action. An act by one party to a transaction that is not observed by the other party.
  • Hidden characteristic. An attribute of a person or thing that is known to one party but unknown to others.
  • Holdup problem. Two firms agree to work together and the firm that acts second takes advantage of a specific investment made by the firm that acts first.
  • Income elasticity of demand (or income elasticity). The percentage change in the quantity demanded divided by the given percentage change in income.
  • Increasing returns to scale (IRS). The property of a production function whereby output rises more than in proportion to an equal proportional increase in all inputs.
  • Indifference curve. The set of all bundles of goods that a consumer views as being equally desirable.
  • Indifference map (or preference map). A complete set of indifference curves that summarize a consumer's tastes or preferences.
  • Inferior good. A good for which the quantity demanded falls as income rises.
  • Innovation. A new idea, device, or method.
  • Interest rate. The percentage more that must be repaid to borrow money for a fixed period of time.
  • Isocost line. All the combinations of inputs that require the same (iso-) total expenditure (cost).
  • Isoquant. A curve that shows the efficient combinations of labor and capital that can produce a single (iso-) level of output (quantity).
  • Law of Demand. Consumers demand more of a good if its price is lower, holding constant the prices of other goods, tastes, and other factors that influence the amount they want to consume.
  • Learning by doing. The productive skills and knowledge that workers and managers gain from experience.
  • Learning curve. The relationship between average cost and cumulative output.
  • Lerner Index. The ratio of the difference between price and marginal cost to the price: (p - MC)>p.
  • Limit pricing. When a firm sets its price (or, equivalently, its output) so that another firm cannot enter the market profitably.
  • Limited liability (for a corporation). The condition whereby the personal assets of the corporate owners cannot be taken to pay a corporation's debts even if it goes into bankruptcy.
  • Long run. A lengthy enough period of time that all relevant inputs can be varied.
  • Managerial economics. The application of economic analysis to managerial decision making.
  • Marginal cost (MC). The amount by which a firm's cost changes if the firm produces one more unit of output.
  • Marginal product of labor (MPL). The change in total output resulting from using an extra unit of labor, holding other factors constant.
  • Marginal profit. The change in profit a firm gets from selling one more unit of output.
  • Marginal rate of substitution (MRS). The rate at which a consumer can substitute one good for another while remaining on the same indifference curve.
  • Marginal rate of technical substitution (of capital for labor, MRTS). The units of capital the firm can replace with an extra unit of labor while holding output constant.
  • Marginal rate of transformation (MRT). The trade-off the market imposes on the consumer in terms of the amount of one good the consumer must give up to purchase more of the other good.
  • Marginal revenue (MR). The change in revenue a firm gets from selling one more unit of output.
  • Marginal utility. The extra utility that a consumer gets from consuming one more unit of a good.
  • Market. An exchange mechanism that allows buyers to trade with sellers.
  • Market failure. A non-optimal allocation of resources such that total surplus in a market is not maximized.
  • Market power. The ability of a firm to significantly affect the market price.
  • Market structure. The number of firms in the market, the ease with which firms can enter and leave the market, and the ability of firms to differentiate their products from those of their rivals.
  • Maximin strategy (in a game). A strategy that maximizes the lowest possible payoff the player might receive.
  • Mixed strategy. A player in a game chooses among possible pure strategies according to probabilities it assigns.
  • Model. A description of the relationship between two or more variables.
  • Monopolistic competition. A market structure in which firms have market power, but free entry occurs in the long run until no additional firm can enter and earn a positive long-run profit.
  • Monopoly. The sole supplier of a good that has no close substitute.
  • Moral hazard. An informed party takes an action that another party cannot observe and that harms the lessinformed party.
  • Multivariate regression (or multiple regression). Regression with two or more explanatory variables.
  • Nash equilibrium. A set of strategies such that, holding the strategies of all other players constant, no player can obtain a higher payoff by choosing a different strategy.
  • Nash-Bertrand equilibrium (or Bertrand, Bertrand-Nash equilibrium). A set of prices such that, holding the prices of all other firms constant, no firm can obtain a higher profit by choosing a different price.
  • Nash-Cournot equilibrium (or Cournot, Cournot-Nash equilibrium). A set of quantities chosen by firms such that, holding the quantities of all other firms constant, no firm can obtain a higher profit by choosing a different quantity.
  • Natural monopoly. The situation in which one firm can produce the total output of the market at lower cost than two or more firms could.
  • Network externality. The situation in which one person's demand for a good depends on the consumption of the good by others.
  • Nonlinear price discrimination (or second-degree price discrimination). A firm charges a different price for large quantities than for small quantities, with the result that the price paid varies according to the quantity purchased.
  • Nonuniform pricing. Charging consumers different prices for the same product, or charging a single customer a price that depends on the number of units the customer buys.
  • Normal good. A good for which the quantity demanded increases as income rises.
  • Normative statement. A belief about whether something is good or bad.
  • Oligopoly. A market structure with only a few firms and limited entry.
  • Open-access common property. Resources to which everyone has free access and equal rights to exploit.
  • Opportunistic behavior. Taking advantage of someone when circumstances permit.
  • Opportunity cost (or economic cost). The value of the best alternative use of a resource.
  • Opportunity set. All the bundles a consumer can buy, including all the bundles inside the budget constraint and on the budget constraint.
  • Pareto efficient. An outcome with the property that any change would harm at least one person.
  • Pareto improvement. A change, such as a reallocation of goods and services between people, that helps at least one person without harming anyone else.
  • Pareto principle. Society should favor any change that benefits some people without harming anyone else.
  • Patent. An exclusive right granted to the inventor of a new and useful product, process, substance, or design for a specified length of time.
  • Payoffs (of a game). Players' valuations of the outcome of the game, such as profits for firms or income or utilities for individuals.
  • Peak-load pricing. Charging higher prices during periods of peak demand than in other periods.
  • Perfect complements. Goods that a consumer wants to consume only in fixed proportions.
  • Perfect price discrimination (or first-degree price discrimination). A situation in which a firm sells each unit at the maximum amount any customer is willing to pay for it.
  • Perfect substitutes. Goods that are essentially equivalent from the consumer's point of view.
  • Positive statement. A testable hypothesis about matters of fact such as cause-and-effect relationships.
  • Price discrimination. Charging consumers different prices for the same good based on individual characteristics of consumers, on membership in an identifiable subgroup of consumers, or on the quantity purchased.
  • Price elasticity of demand (or elasticity of demand, demand elasticity, 훆). The percentage change in the quantity demanded, Q, divided by the percentage change in the price, p.
  • Price elasticity of supply (or elasticity of supply). The percentage change in the quantity supplied divided by the percentage in price.
  • Prisoners' dilemma. A game in which all players have dominant strategies that lead to a payoff that is inferior to what they could achieve if they cooperated.
  • Private cost. A firm's direct costs of production (such as the cost of inputs), but not including any costs imposed on others.
  • Producer surplus (PS). The difference between the amount for which a good sells and the minimum amount necessary for the producers to be willing to produce the good.
  • Production function. The relationship between the quantities of inputs used and the maximum quantity of output that can be produced, given current knowledge about technology and organization.
  • Profit (훑). Revenue minus opportunity cost.
  • Public good. A commodity or service that is both nonrival and nonexclusive.
  • Pure strategy. A specification of the action that a player will take in every possible situation in a game.
  • Quantity demanded. The amount of a good that consumers are willing to buy at a given price, holding constant the other factors that influence purchases.
  • Quantity supplied. The amount of a good that firms want to sell at a given price, holding constant other factors that influence firms' supply decisions, such as costs and government actions.
  • Random error term (in a regression equation). A term that captures the effects of unobserved influences on the dependent variable that are not included as explanatory variables.
  • Regression analysis. A statistical technique used to estimate the mathematical relationship between a dependent variable, such as quantity demanded, and one or more explanatory variables, such as price and income.
  • Regression specification. Includes the choice of the dependent variable, the explanatory variables, and the functional relationship between them (such as linear, quadratic, or exponential).
  • Rent seeking. Devoting effort and expenditures to gain a rent or a profit from government actions.
  • Reservation price. The maximum amount a person is willing to pay for a unit of output.
  • Risk averse. Unwilling to make a fair bet.
  • Risk neutral. Indifferent about making a fair bet.
  • Risk preferring. Always willing to make a fair bet.
  • Risk premium. The maximum amount that a decision maker would pay to avoid taking a risk. (Equivalently, the risk premium is the minimum extra compensation (premium) that a decision maker would require to incur a risk.)
  • Rival good. A good that is used up as it is consumed.
  • Rules of the game. Regulations that determine the timing of players' moves and the actions that players can make at each move, and possibly other specific aspects of how the game is played.
  • Screening. An action taken by an uninformed party to determine the information possessed by informed parties.
  • Short run. A period of time so brief that at least one factor of production cannot be varied practically.
  • Shortage. A persistent excess demand.
  • Signaling. An action taken by an informed party to send information to an uninformed party.
  • Snob effect. The situation in which a person places greater value on a good as fewer and fewer other people possess it.
  • Social cost. All the costs incurred by society, including the private costs of firms and individuals and the harm from externalities.
  • Static game. A game in which each player acts only once and the players act simultaneously (or, at least, each player acts without knowing rivals' actions).
  • Strategy. A battle plan that specifies the actions or moves that a player will make conditional on the information available at each move and for any possible contingency.
  • Subgame. All the subsequent actions that players can take given the actions already taken and the corresponding payoffs.
  • Subgame-perfect Nash equilibrium. Players' strategies are a Nash equilibrium in every subgame (including the overall game).
  • Substitutes. A pair of goods or services for which an increase in the price of one causes a consumer to demand a larger quantity of the other.
  • Sunk cost. A past expenditure that cannot be recovered.
  • Supply curve. The quantity supplied at each possible price, holding constant the other factors that influence firms' supply decisions.
  • Technical progress. An advance in knowledge that allows more output to be produced with the same level of inputs.
  • Technological efficiency (or efficient production). The property of a production function such that the current level of output cannot be produced with fewer inputs, given existing knowledge about technology and the organization of production.
  • Tit-for-tat strategy. In a game, a strategy for repeated prisoners' dilemma games that involves cooperation in the first round and then copying the rival's previous action in each subsequent round.
  • Total cost (or cost, C). The sum of a firm's variable cost and fixed cost: C = VC + F.
  • Total surplus. The sum of consumer surplus and producer surplus, TS = CS + PS.
  • Transaction costs. The expenses, over and above the price of the product, of finding a trading partner and making a trade for the product.
  • Transfer price. The price used for an intra-firm transfer of goods or services.
  • Trigger strategy (in a game). A strategy in which a rival's defection from a collusive outcome triggers a punishment.
  • Two-part pricing. A pricing system in which the firm charges each consumer a lump-sum access fee for the right to buy as many units of the good as the consumer wants at a per-unit price.
  • Unbiased. An estimation method that produces an estimated coefficient, b that equals the true coefficient, b, on average.
  • Uniform pricing. Charging the same price for every unit sold of a particular good.
  • Utility. A set of numerical values that reflect a consumer's relative rankings of various bundles of goods.
  • Utility function. The relationship between a utility measure and every possible bundle of goods.
  • Variable cost (VC). A cost that changes as the quantity of output changes.
  • Variable input. A factor of production whose quantity can be changed readily by the firm during the relevant time period.
  • Vertically integrated. Describing a firm that participates in more than one successive stage of the production or distribution of goods or services.
  • Winner's curse. In an auction, the phenomenon that a winner's bid exceeds a common-value item's value.
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