Definitions Flashcards
Interest Rates
The reward for saving and the cost of borrowing
Three types of Inflation
Demand-Pull Inflation, Cost-Push Inflation and Built-in Inflation
Inflation
Inflation describes an increase in overall price level of goods and services within an economy over a certain period.
Abnormal profit
Abnormal profit is any profit in excess of normal profit - also known as supernormal profit
Anti competitive behaviour
Anti-competitive practices are business strategies designed deliberately to limit the degree of competition inside a market
Asymmetric information
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
Barriers to entry
Barriers to entry are designed to block potential entrants from entering a market profitably
Behavioural economics
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
Bilateral monopoly
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
Break even
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
Break even output
The break-even output occurs when AR=ATC (at this output, normal profit only is made)
Business ethics
Business ethics is concerned with the social responsibility of management towards the firm’s major stakeholders, the environment and society in general
Collective bargaining
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
Collusive oligopoly
When several large firms in an industry act to restrict price or output
Compensating wage differentials
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
Competition policy
Government policy which seeks to promote competition and efficiency in different markets and industries
Complex monopoly
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
Concentration ratio
Measure the proportion of an industry’s output or employment accounted for by, say, the three, five or seven largest firms
Constrained revenue maximisation
Shareholders of a business may introduce a constraint on the price and output decisions of managers – this is
known as constrained sales revenue maximisation
Consumer surplus
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)
Contestable market
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.”
Cost benefit analysis
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
Cost reducing innovation
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
Cross subsidy
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
Deadweight loss
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
Dependency ratio
The ratio of dependent population (the young and the elderly) to the working age population
Deregulation of markets
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
Derived demand
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
Economic good
A economic good has a opportunity cost
Free goods
Have no opportunity cost
public good
non rivalry non excludable
private good
rival, excludable, has a opportunity cost
