Microeconomics For Dummies

Glossary

Adverse selection

An outcome caused by asymmetric information where a product is selected only by the people who’ll make the worst returns for a supplier — for example, only people with risky lifestyles buying life insurance. The typical effect is that the market fails.

Agent

(1) Anyone who acts in an economic model. (2) In the principal-agent model, anyone who acts on behalf of the principal.

Allocative efficiency

When a firm produces up to the point where price equals marginal cost. As a result, when firms are allocatively efficient, no deadweight loss exists because the price paid by consumers equals the marginal cost incurred.

Asymmetric information

A situation in which one side of a trade knows more relevant information than the other — for example, when sellers know more about the quality or performance of their product than buyers.

Auction

A way of selling a good where an auctioneer calls out prices and solicits bids from potential buyers. The good being auctioned goes to one buyer — usually the highest bidder.

Average cost

Total cost divided by the number of units of output produced — in other words, costs per unit output.

Backward induction

A method of solving dynamic games by starting at the end payoffs and working backwards, eliminating any move that would yield a lower payoff.

Barriers to entry

Anything that significantly raises the irrecoverable or sunk cost to a firm of entering a market and thus deters one from entering.

Bertrand oligopoly

A model ...