C7 - Definitions Flashcards
Utility
The satisfaction received from consumption of goods or services.
Total utility
Total satisfaction received from consumption.
Marginal utility
Utility derived from the consumption of one more unit of good or service.
Positive marginal utility
When the consumption of an additional item increases the total utility.
Negative marginal utility
When the consumption of an additional item decreases the total utility.
Diminishing marginal utility
Fall in marginal utility as consumption increase.
Equimarginal principle
Consumer maximise their utility where their marginal valuation for each product consumed is the same.
Budget line
The combinations of 2 products obtainable with given income and prices.
Indifference curve
Shows the different combinations of two goods that give a consumer equal satisfaction.
Income effect
The income effect is the change in a good’s consumption brought by a change in real purchasing power.
Substitution effect
The substitution effect is the change in a good’s consumption associated with a change in the relative price of the good, with the level of utility constant.
Behavioural economics
A branch of economics that builds on the psychology of human behaviour in decision making.
Marginal rate of substitution
The rate at which a consumer is willing to give up amount of other good to obtain one extra unit of the good in question without affecting total satisfaction.
Consumer optimal point of consumption
Where the budget line touches or is at tangent to the indifference curve.
Giffen good
Demand falls as the price of the good falls and demand increases as the price increases.
Economic efficiency
Scarce resources are used in the most efficient way to produce maximum output.
Productive efficiency
Firm is producing using least possible resources and at the lowest possible cost. (lowest point on ATC curve)
Allocative efficiency
Firms are producing goods and services most wanted by consumers. (P = MC)
Pareto optimality
Not possible to make someone better off without making someone else worse off. (Resources are allocated in the most efficient way)
Dynamic efficiency
A form of productive efficiency that benefits a firm over time.
Market failure
A market failure is a situation where free markets fail to allocate resources efficiently.
Private costs
Costs that incrred by an individual who produces a good or service.
External costs
Those costs incurred and paid for by third parties not involved in the action.
Social costs
Total costs of a particular action.
Private benefits
Monetary gain or other forms of benefits that an individual or producer receives from consuming or producing goods or services.
External benefits
Benefits that are received by third parties that are not involved in the transaction.
Social benefits
Total benefits arising from a particular action.
Externalities
Actions of producers or consumer give rise to side effects on third parties who are not involved in the actions.
Negative externality
Production or consumption of a good or service that results a cost to third party.
Negative production externaltiies
Negative externality that arise from production activity.
Negative consumption externalities
Negative externality that arise from consumption of a good or service.
Positive production externalities
Benefits that third party enjoy that are created by producers of goods and services.
Positive consumption externalities
Positive externalities that arise from consumption of a good or service.
Asymmetric information
Occurs when one party in the market, usually the seller, has some information that the other party, usually the buyer, does not have.
Adverse selection
Hidden characteristics, when only one party knows more about a situation than the other party.
Moral hazards
Hidden actions, when one party takes actions that the other party cannot observe but which affect both of them.
Cost-benefit analysis
A method that assess the desirability of a project which takes into account of all costs and benefits (including social costs and social benefits)
Shadow price
One that is applied where there is no recognized market price available.
Isoquant
A curve showing the possible combinations of 2 factors of production that can be used to produce the same level of output.
Short run
Time period when at least one factor of production is in fixed supply.
Total product
Total output of a firm.
Marginal product
The change in output arising from the use of an additional factor of production.
Production function
Graph that shows the maximum possible output from a given set of factor inputs.
Negative marginal returns
No returns plus decrease overall output.
Increasing marginal returns
The addition of a variable input to a fixed input enables the variable input to be more productive.
Diminishing marginal returns
Output from an additional unit of input leads to fall in marginal product.
Firm
A business organisation that hires factors of production in order to produce goods and services that can be sold as a profit.
Fixed cost
Costs that are independent of output in short run.
Variable cost
Costs that vary directly with output.
Short run
A period of time where at least 1 factor of production is fixed.
Long run
A period of time where all factors of productions are variable.
Increasing returns to scale
Output increase at a proportionately faster rate than increase in factor inputs.
Decreasing returns to scale
Factor input increase at a proportionately faster rate than increase in output.
Isocosts
Lines of constant relative costs for the factors of production.
Long run average cost (LRAC)
LRAC curve shows the least cost combination of production any particular quantity.
Minimum efficient scale
Lowest level of output at which costs are minimized.
Economies of scale
Benefits gained from falling LRAC as scale of output increases.
Diseconomies of scale
LRAC increase as scale of output increase.
Internal economies of scale
The benefits that arise to firm as a result of its decision to produce on a larger scale.
Technical economies (type of internal economies of scale)
Advantages gain directly in the production process.
Purchasing economies (type of internal economies of scale)
Larger firms has higher purchasing power with suppliers.
Marketing economies (type of internal economies of scale)
Larger firms are able to promote their products on TV or press at lower rates.
Managerial economies (type of internal economies of scale)
Larger firms employed specialised employees and this increase efficiency, reduce costs.
Financial economies (type of internal economies of scale)
Large firms usually have better access to borrowed funds than smaller firms.
Technological economies (type of internal economies of scale)
Firms can make cost savings through the application of online ordering and booking system.
Risk-bearing economies (type of internal economies of scale)
As firms get larger, they become more diversified.
External economies of scale
Cost savings accruing to all firms in an industry as scale increases.
Revenue
Income generated from the sale of goods and services in a market.
Marginal revenue
Additional revenue received by firm if it sells an additional unit of output.
Total revenue for firm
Total expenditure from consumer.
Profit
Difference between total revenue and total cost.
Normal profit
Cost of production that is sufficient for a firm to keep operating in a particular industry.
Abnormal profit (supernormal profit)
The profit that is earned above normal profit.
Subnormal profit
When the profit that is earned by a firm is less than normal profit.
Small and medium enterprise (SME)
Refers to firms with fewer than 250 employees; small firms have fewer than 50 employees.
Industry
Sum of all the firms making the same product or in the same line of business.
Multinational corporation (MNC)
Firm that operate in different countries.
Market structures
The way in which a market is organised in terms of the number of firms and the barriers to entry of new firms.
Barriers to entry
Any restrictions that prevent new firms from entering an industry.
Perfect competition
An ideal market structure that has many buyers and sellers, identical or homogeneous products.
Monopoly
Monopoly is where a firm controls the entire output of the industry (pure monopoly).
Monopolistic competition
A market structure where there are many firms, differentiated products and few barriers to entry.
Oligopoly
A market structure with few firms dominating the market and higher barriers to entry.
Natural monopoly
Single supplier has substantial cost advantage such that competing producers will raise cost and create duplication which leads to inefficient use of resources.
Barrier to exit
Any restriction that prevent firms from leaving a market.
Price takers
Firm must accept whatever price that is set in the market.
Horizontal integration
Firm grows through merger or acquisition of another firm in the same sector of industry.
Collusion
Organisations cooperate in secret agreement.
Price leadership
Market situation whereby a particular firm has the power to change prices.
Cartel
A formal agreement between firms to limit competition by limiting output or fixing prices.
Prisoner’s Dilemma
A concept in oligopoly that demonstrates why two otherwise rational people might not cooperate.
Price maker
Firm that has the power to set the price.
X-inefficiency
A firm is not producing at the lowest possible cost for a given level of output.
Contestable market
A contestable market refers to any market structure where there is a threat potential entrants are free and able to enter the market.
Product differentiation
A strategy adopted by firms that marks their product as being different from their competitors.
Game theory
A method of modelling the strategic interaction between firms in an oligopoly.
Dominant strategy
A situation in game theory where a player’s best strategy is independent of those chosen by others.
Nash equilibrium
A situation occurring within a game when each player’s chosen strategy maximizes payoffs given the other player’s choice, so no player has an incentive to alter behaviour.
Tacit collusion
A situation occurring when firms refrain from competing on price but without communication or formal agreement between them.
N-firm concentration ratio
A measure of the market share of the largest n firms in an industry.
Economies of scope
Reduction in ATC made possible by firm increasing different goods it produces.
Internal growth
The profits earned are reinvested back into form of new investment projects, rather than paid out as dividends to shareholders.
External growth
Business expands through mergers and acquisitions.
Diversification
A firm grows through the production or sale of wide range of different products.
Vertical integration
A firm grows by producing backwards or forwards in its supply chain.
Divorce of ownership and control
The fact that a public limited company is owned by one group (shareholders) and controlled and run by another (managers).
Principal-agent problem
In large public limited companies, the divorce of ownership and control may mean that principals (shareholders) may have different objectives from the agents (managers) and principals cannot guarantee that their agents will operate in the principal’s best interests.
Profit satisficing
Where there is a divorce of ownership from control, the managers of a frim may wish to deal with all the stakeholders of a firm in such a way that all stakeholders are satisfied; in this situation, satisfactory, rather than maximum, profits may be the objective of a firm.
Sales revenue maximisation
In some firms, the objective may be to maximise the sales revenue of a firm rather than the profits, so the output would be higher and the price would be lower than the profit maximising position.
Sales maximisation
Firm’s objective to maximise volume of products sold without making a loss.
First degree price discrimination
Firm sells each unit of product to different consumers, charging each the price that they are willing to pay.
Second degree price discrimination
Consumers are willing to purchase more of a product if price falls when more units are bought.
Third degree price discrimination
A firm charges different prices to different groups of people who have different PED for the product.
Limit pricing
Firms set a lower short-run price to discourage new entrants into the market.
Predatory pricing
This occurs when a firm purpose sets a very low price to either force a new firm out of the market (new firm has no choice but to match the price) or to protect its own market share from a rival firm.
Price leadership
All firms in the market accept the price set by leading firm, usually one with largest market share.
Production function
A mathematical functional relationship quantity of factor inputs and the total product or output of a product such that with a given combination of factor inputs and technology at a given period of time, the maximum possible output can be produced.
