Click on the letter links below to access definitions of all key terms from the textbook.
The cost borne by the producer in reducing an externality.
Action profile (outcome)
Combinations of actions that might be chosen by players.
Advances in technology (technological progress)
Changes in the state of technology over time.
Asymmetric information exerts a negative externality on sellers of high-quality goods.
Information used as the starting point for making a decision.
Arrow’s Impossibility Theorem
No rank-order voting system can convert individual preferences into a satisfactory social preference ordering.
A firm’s monopoly power if derived from legal restrictions that prevent entry.
The situation in which players’ information sets differ.
Observable signs, which can be manipulated by informed players and whose value is used by uninformed players to update priors.
Selling a good by inviting potential buyers to announce the amount they are willing to pay.
A person who announces successive prices until declaring a set at which markets clear.
The ease of recall of an item, taken as a measure of its relative frequency.
The production cost per unit of output.
Revision (or updating) of a prior on receipt of information.
A random variable, defining beliefs whose subjective probability distribution changes as information is received.
The ideal consumption bundle.
Budget (affordability) constraint
Those consumption bundles that cost the full amount of money available.
Budget (affordable) set
All the consumption bundles that can be acquired for a cost less than income.
The monetary value of assets used in business.
Changes at the margin
Very small changes in the level of an activity.
Sources of utility embodied within a good.
Characteristics (of experience goods)
Underlying (unobservable) qualities of a good, which nevertheless determine its value.
Mental processes involved in knowledge acquisition.
Mental tension caused by mutually incompatible cognitions.
Agreement between firms regarding their behaviour in order to increase their profits.
Common property resource
An excludable resource to which members of a group have access.
A good with the same value to all bidders, for which estimates of value are inferred from signals.
Compensated (Hicksian) demand
The demand of the expenditure-minimizing consumer.
A game in which increasing payoffs for one player require a reduction in others’ payoffs.
A preference relation defi ned for every pair of consumption bundles.
A belief about actions that competitors will choose.
All firms’ beliefs about competitors’ actions are correct.
A public display of consumption to demonstrate wealth.
Methods for solving problems of choice whereby solutions are drawn from a restricted set.
A combination of quantities of the goods available to the consumer.
A list of total expenditure in a sequence of time periods.
Every preferred set is convex.
A game with several equilibria, in which players realize gains by coordinating their actions.
The least possible expenditure required to produce any level of output, given input prices.
Costs of production
The expenditure that is necessary in order to make sales.
The belief that a competitor’s output will not vary with own output.
The relation between the price of a good and the quantity that a consumer buys.
The ratio of the present value of money to its future value.
The action that is the best reply to all actions other players might choose.
Dominant strategy equilibrium
The Nash equilibrium in which every player’s strategy is dominant.
Dutch (descending) auction
An auction conducted by open outcry, with the WTA descending; the first bid wins.
FFactor of production
An asset hired by a firm in its production process.
A business entity; often a limited company.
First-degree price discrimination
Selling each unit of a good at a different price.
An auction in which the highest bidder wins and pays their own bid.
Obtaining access to a public good without contributing to the cost of its provision.
Assets such that individual units are perfect substitutes.
The value of a sum of money available at the present time, evaluated at a certain time in the future.
A mathematical model of interactions between decision makers.
All market prices are determined at the same time, with simultaneous market clearing.
An increase in the price of a good leads to an increase in demand.
A decision-making rule.
The path through a decision tree, from the initial node to the payoffs.
Homogeneity of degree t
The responsiveness of a function to scalar changes in inputs.
Spatial differentiation such that consumers’ preferences over characteristics differ.
A property of a mechanism such that participants reveal their true type.
The change in demand following a price increase that is associated with a loss of purchasing power.
Income elasticity of demand
The responsiveness of a consumer’s demand to a change in income.
Income expansion path
A curve showing the most-preferred, affordable consumption bundles as income varies.
Income offer curve
An alternative name for the income expansion path.
The situation in which a player in a game lacks information relevant to a decision.
A quality of successive trials, such that the outcome of one cannot be (causally) related to the outcome of the others.
Equal ranking of outcomes, so that neither is seen as better than the other.
The representation of all equally preferred consumption bundles.
The greatest utility possible given prices and the money available to finance consumption.
Individual (firm) supply
The quantity of output produced by a fi rm at a given price.
The quantity of a good purchased at a given price.
A good for which demand decreases with income.
The utility generated in a specific time period.
Inverse demand function
The price a firm can set as a function of the quantity consumers demand.
All of the input combinations that can be hired for a set price.
A contour of profit function, showing combinations of firm outputs for which one firm achieves a target profit.
A curve that shows input combinations for which output is constant.
The number of hours of effort directed to production activity.
Law of small numbers
The belief that a sample should have the distributional properties of the whole population.
A period in which the use of all factors can be varied.
A desire to avoid losses.
A description of an experiment in terms of the values taken by a random variable, representing outcomes and their associated probability distribution
The rate at which costs change as output changes.
The rate of change of output as usage of one input varies.
Marginal rate of substitution (MRS)
The rate of decline in consumption of a good that compensates for the rising consumption of an alternative good.
Marginal rate of technical substitution
The rate at which one factor input must be substituted for another in order to maintain output.
Marginal rate of transformation
A rate at which output of one good falls as output of another increases.
The rate of change of utility as the quantity available of one good increases.
Marginal utility of a good
The rate of change of utility as consumption of the good increases, consumption of other goods being held constant.
A situation in which potential sellers offer the quantity of a good that buyers wish to purchase.
Firms’ strategies ensure that all consumers are in the market, with no unmet demand.
The total quantity of a good purchased in a market at a given price.
The market price and the quantity traded such that the market supply equals the market demand.
A situation in which market participants, by their actions, can affect the quantity traded or the market price.
The price at which all transactions completed in a market take place.
The total quantity of a good brought to market at a given price.
An abstraction from the physical concept of a place and a time at which buyers and sellers of a good or a service meet to take part in exchanges.
An incentive structure designed to elicit the truthful revelation of type or preferences.
A person at the centre point of a one-dimensional distribution of political beliefs.
Median voter theorem
The claim that the manifestos of political parties are very similar on the basis that to win power each party requires the support of the median voter.
Method of equal gradients
A method of solving problems of choice that explicitly applies the equimarginal principle and resource constraints.
The strategy of choosing the action that has the highest minimum payoff.
A probability distribution over actions, used to choose a player’s action.
The firm is the only supplier in a market.
Monotonically increasing transformation
A larger domain value leads to a larger image value.
If bundle Y has no less of any good than bundle Z, then Y is (weakly) preferred to Z.
An outcome in which all strategies are the best replies to other players’ actions.
A firm’s monopoly power if derived from increasing returns in production.
Externality with a harmful effect.
A benefit accruing to the user of a good or a service from its use by others.
The money that is available to purchase goods and services.
A good for which demand increases with income.
A good that serves as unit of value in the economy.
A market structure in which a few fi rms supply a good or service.
Open access resource
A non-excludable but rivalrous resource.
Learning based on the acquisition of rewards (or the experience of punishment) for behaviour.
The quantity of goods forgone in order to increase consumption of some specific good.
Ordinary (Marshallian) demand
The demand of the utility-maximizing consumer.
A value in a model that is fixed but indeterminate.
A division such that no further Pareto improvements exist.
A division of endowment such that no one is worse off and at least one person is better off.
Pareto set (contract curve)
All divisions are Pareto-efficient.
A market outcome that is determined by conditions in that market only.
Faced with a discrete choice, participation does not make the agent worse off.
Perfect Bayesian equilibrium
Equilibrium of an extensive game with incomplete information, in which all players’ revisions of priors and strategies are consistent.
A pair of goods for which the marginal rate of substitution is zero.
Technology that allows infi nitesimally small increments in factor use.
A situation in which a person has all the information she or he needs to make a decision.
A market in which the assumptions of perfect competition all hold.
Perfect price discrimination
Selling each unit of a good at the buyer’s WTP.
A pair of goods for which the marginal rate of substitution is constant.
Perfectly elastic demand
The demand falls to zero after any price rise.
Perfectly inelastic demand
No change in demand after a price rise.
A tax whose marginal rate is the marginal social cost less the marginal private cost.
A participant in a game.
The elasticity measure at a specific point on a curve.
Utility depends upon the level of consumption relative to other consumers’ consumption.
Externality with a beneficial effect.
A ranking of two outcomes based on which one is considered better.
A complete ranking of all consumption bundles.
The value of a sum of money available at some future date, as if available now.
Selling units of a good at different prices.
Price elasticity of demand
The responsiveness of a consumer’s demand to changes in prices.
Price offer path
The set of all the most-preferred, affordable consumption bundles that are formed when the price of one good varies.
A firm that accepts the market price as given.
A monopoly’s ability to make profits from a marginal transaction.
The cost borne by an individual in making a decision that gives rise to an externality.
A good that is excludable and rivalrous.
Personal valuations derived from private signals.
A function that measures the likelihood of particular events occurring.
Procedural (bounded) rationality
Making choices using some prescribed decision making process.
The situation in which all units of a good are identical.
The process by which a firm takes factor inputs and turns them into goods and services.
The relationship between inputs used and output.
Production possibility frontier
A curve formed from just feasible output combinations.
A firm’s revenues from sales, less the costs of production.
The difference between revenues and costs.
An alternative name for a lottery.
A behavioural theory of decision making when faced with uncertainty.
A good that is both non-excludable and non-rivalrous.
The firm in an oligopoly that chooses its output level first.
A function whose value is determined by random events.
A quality of a trial such that all outcomes are equally likely to occur.
The optimal choice as a function of conjectures about competitors’ behaviour.
The capacity to generate utility from consumption.
A preference relation that allows the bundle to be compared with itself.
The probability of an outcome greater where the sample’s distributional properties are the same as those of the population.
Returns to scale
A measure of the responsiveness of output to the scale of inputs.
Revenue (total revenue)
A firm’s income from selling output.
The income that the seller obtains from sales of goods and services.
Behaviour that reflects a preference for a certain outcome rather than participation in lotteries.
Behaviour that reflects a preference for participation in lotteries rather than a certain outcome.
Indifference between certain outcomes and participation in lotteries.
The payment that a risk averse person will make to transfer the risk to someone else.
A property of a good such that use by one person reduces the quantity available to others.
Setting an acceptability target for a choice, and stopping a procedurally rational process as soon as the target is reached.
Scale of production
Given constant technology, a measure of the extent of use of all input factors.
The situation in which the quantity of a good or service that is sought is less than the amount that is available.
An auction in which bids are submitted in writing.
Second-degree price discrimination
Setting a different price for each buyer of the good.
An alternative name for a Vickrey auction.
Justification of a choice by assertion of the existence of preferences.
The outcome of a game in which a signal allows correct identification of types.
A period in which the use of one factor is fixed.
Manipulation of an attribute to convey information about a characteristic.
The cost of activity, including negative externalities.
An individual with authority to allocate resources to maximize social welfare.
An aggregation of individual preferences over outcomes.
Social welfare function
A function that weights individual preferences.
The distribution of goods’ characteristics that can be measured.
State of technology
A measure of the inputs required at any time to produce an output unit.
Strategic game of complete information
A game in which a fi xed group of players choose their actions at the same time, anticipating others’ behaviour.
A situation in which the decisions of each participant affect all other participants’ payoffs.
Actions that a player chooses, given that player’s beliefs (about other players’ actions).
Strategy (in extensive games)
A listing of the actions that a player chooses (given previous actions) whenever called on to make a choice.
The part of game that begins at the end of a sub-history, whose length is the number of decisions made in it.
An outcome such that the choice made at the end of every sub-history is optimal within the subsequent sub-game.
The initial part of the history.
The minimum consumption required for survival.
The change in demand following a price increase for a consumer with a fixed utility target.
A good for which demand increases more rapidly than income.
Production using an input combination such that using less of any input produces a fall in output.
The relative intensity of use of input factors in production.
Technology of production
The combination of inputs used in producing a (unit) quantity of output.
Third-degree price discrimination
Setting a different price for each class of buyer.
The change in demand following a price increase for a consumer with a fi xed amount of money to spend.
The output that a firm can produce when use of only one input varies.
A preference relation that is consistent, and can therefore be applied successively.
A charging structure based on an access fee plus usage fees.
A measure of the strength of preference for a bundle, set by the preference ordering.
Utility possibility frontier
A curve formed from utility combinations that are just feasible.
A value in a model that is obtained by solving the model.
Spatial differentiation with agreement on the ranking of products.
An auction conducted with written bids, in which the highest bidder wins, and pays an amount equal to the second highest bid.
Vickrey–Clarke–Groves mechanism (VCG)
A mechanism that charges people for the costs that their choices impose on others.
A set of prices that ensures that all markets clear at the same time.
Ranking two outcomes based on one being considered at least as good as the other.
(Weakly) preferred set
All consumption bundles that are ranked at least as highly as the reference bundle.
Welfare loss of monopoly
The cost to society of a good being produced by a monopoly rather than by a perfectly competitive industry.
An ordering represented by infinite, convex, closed, nested preferred sets.
Willingness to accept (WTA)
The minimum price for which a seller will sell one unit of a good.
Willingness to pay (WTP)
The maximum price that a consumer will pay for one unit of a good.
A game in which payoffs in all outcomes sum to zero: a purely competitive game.