Definitions

Question 1

Interest Rates

Answer 1

The reward for saving and the cost of borrowing

Question 2

Three types of Inflation

Answer 2

Demand-Pull Inflation, Cost-Push Inflation and Built-in Inflation

Question 3

Inflation

Answer 3

Inflation describes an increase in overall price level of goods and services within an economy over a certain period.

Question 4

Abnormal profit

Answer 4

Abnormal profit is any profit in excess of normal profit - also known as supernormal profit

Question 5

Anti competitive behaviour

Answer 5

Anti-competitive practices are business strategies designed deliberately to limit the degree of competition inside a market

Question 6

Asymmetric information

Answer 6

Information relating to a transaction in a market where there is imbalance in the information available to either
the buyer or the seller. Asymmetric information can distort the working of the market mechanism and lead to
market failure

Question 7

Barriers to entry

Answer 7

Barriers to entry are designed to block potential entrants from entering a market profitably

Question 8

Behavioural economics

Answer 8

A branch of economics which focuses on understanding the nature of human decision making and which explores
how decisions are taken when economic agents do not have access to full and free information and when their
behaviour is not automatically assumed to be rational

Question 9

Bilateral monopoly

Answer 9

A market in which a single seller faces a single buyer. The final determination of price and output is such a
situation is uncertain - much depends on the relative bargaining strength between the two parties concerned

Question 10

Break even

Answer 10

The break even output is the volume of goods or services that have to be sold in order for the business to make
neither a loss nor a profit. The break even price is when price = average total cost

Question 11

Break even output

Answer 11

The break-even output occurs when AR=ATC (at this output, normal profit only is made)

Question 12

Business ethics

Answer 12

Business ethics is concerned with the social responsibility of management towards the firm’s major stakeholders, the environment and society in general

Question 13

Collective bargaining

Answer 13

Unions might seek to exercise their collective bargaining power with employers to achieve a mark-up on wages
compared to those on offer to non-union members

Question 14

Collusive oligopoly

Answer 14

When several large firms in an industry act to restrict price or output

Question 15

Compensating wage differentials

Answer 15

Wage differentials in part act as a compensation for people who have to work unsocial hours or who are exposed to different degrees of risk at work, both in the short term and long run

Question 16

Competition policy

Answer 16

Government policy which seeks to promote competition and efficiency in different markets and industries

Question 17

Complex monopoly

Answer 17

A complex monopoly exists if at least one quarter (25%) of the market is in the hands of one or a group of
suppliers who, deliberately or not, act in a way designed to reduce competitive pressures within a market

Question 18

Concentration ratio

Answer 18

Measure the proportion of an industry’s output or employment accounted for by, say, the three, five or seven largest firms

Question 19

Constrained revenue maximisation

Answer 19

Shareholders of a business may introduce a constraint on the price and output decisions of managers – this is
known as constrained sales revenue maximisation

Question 20

Consumer surplus

Answer 20

Consumer surplus is the difference between the total amount that consumers are willing and able to pay for a good or service (indicated by the demand curve) and the total amount that they actually pay (the market price)

Question 21

Contestable market

Answer 21

Baumol defined contestable markets as existing where “an entrant has access to all production techniques
available to the incumbents, is not prohibited from wooing the incumbent’s customers, and entry decisions can be reversed without cost.”

Question 22

Cost benefit analysis

Answer 22

Cost benefit analysis (COBA) is a technique for assessing the monetary social costs and benefits of a capital
investment project over a given time period

Question 23

Cost reducing innovation

Answer 23

Cost reducing innovations have the effect of causing an outward shift in market supply and they also provide the
scope for businesses to enjoy higher profit margins with a given level of demand

Question 24

Cross subsidy

Answer 24

A firm operates a cross subsidy when it uses profits from one line of business to finance losses in another line of
business. There are many reasons for maintaining a cross subsidy, either to promote a product new to the market
which is making losses, or as a form of predatory pricing designed to eliminate an existing competitor, the latter is
illegal under UK and European competition law

Question 25

Deadweight loss

Answer 25

A loss of social welfare deriving from a policy or action that has no corresponding gain. Deadweight losses of
welfare are often associated with the economic costs of monopoly power in a market or the effects of negative and positive externalities that remain ignored by the free market mechanism

Question 26

Dependency ratio

Answer 26

The ratio of dependent population (the young and the elderly) to the working age population

Question 27

Deregulation of markets

Answer 27

Also known as market liberalisation, de-regulation involves the opening up of markets to competition by reducing
some of the statutory barriers to entry that exist

Question 28

Derived demand

Answer 28

The demand for all factors of production (inputs), including labour, is a derived demand i.e. the demand for
factors of production depends on the demand for the products they produce

Question 29

Economic good

Answer 29

A economic good has a opportunity cost

Question 30

Free goods

Answer 30

Have no opportunity cost

Question 31

public good

Answer 31

non rivalry non excludable

Question 32

private good

Answer 32

rival, excludable, has a opportunity cost