Definitions Theme 3 Flashcards
Allocative efficiency
When resources are allocated to the best interests of society, when
there is maximum social welfare and maximum utility; P=MC
Asymmetric
information
Where one party has more information than the other, leading to
market failure and causing problems for regulators
Average cost/average
total cost (AC/ATC)
The cost of production per unit
total costs/
quantity produced
Average revenue (AR)
The price each unit is sold for
TR/quantity sold
Bilateral monopoly
Where there is only one buyer and one seller in the market
Cartels
A formal collusive agreement where firms enter into an agreement to
mutually set prices
Collusion
Occurs when firms agree to work together, for example by setting a
price or fixing the quantity they produce
Competition policy
Government action to increase competition in markets
Competitive tendering
When the government contracts out the provision of a good or service
and invites firms to bid for the contract
Conglomerate
integration
The merger of firms with no common connection
Constant returns to
scale
Output increases by the same proportion that the inputs increase by
Contestable market
When there is the threat of new entrants into the market, forcing firms to be efficient
Decreasing returns to
scale
An increase in inputs by a certain proportion will lead to output
increasing by a smaller proportion
Demergers
A single business is broken into two or more businesses to operate on
their own, to be sold or to be dissolved
Deregulation
The removal of legal barriers to allow private enterprises to compete
in a previously protected market
Derived demand
The demand for one good is linked to the demand for a related good
Diminishing marginal
productivity
If a variable factor is increased when another factor is fixed, there will
come a point when each extra unit of the variable factor will produce less extra output than the previous unit; after a certain point, marginal
output falls
Diseconomies of scale
The disadvantages that arise in large businesses that reduce
efficiency and cause average costs to rise
Divorce of ownership
from control
Firms are owned by shareholders, who have little say in the day to
day running of the business, and controlled by managers; this leads to the principal-agent problem
Dynamic efficiency
Efficiency in the long run; concerned with new technology and
increases in productivity which causes efficiency to increase over a
period of time
Economies of scale
The advantages of large scale production that enable a large
business to produce at a lower average cost than a smaller business
External economies of
scale
An advantage which arises from the growth of the industry within
which the firm operates, independent of the firm itself
Fixed cost
For-profit business
A business whose main aim is to make money
Game theory
Used to predict the outcome of a decision made by one firm, when it
has incomplete information about the other firm
Geographical mobility
of labour
The ease and speed at which labour can move from one area to
another
Horizontal integration
The merger of firms in the same industry at the same stage of
production
Increasing returns to
scale
An increase in inputs by a certain proportion will lead to an increase in
output by a larger proportion
Interdependent
The actions of one firm directly affects another firm
Internal economies of
scale
An advantage that a firm is able to enjoy because of growth in the
firm, independent of anything happening to other firms or the industry in general
Limit pricing
When firms set prices low in order to prevent new entrants; used in
contestable markets
Loss
When revenue does not cover costs
Marginal cost
The additional cost of producing one extra unit of good
Marginal revenue
The additional revenue gained by selling one extra unit of good
Maximum wage
A ceiling wage which people cannot earn above
Minimum efficient
scale
The lowest level of output necessary to fully exploit economies of
scale
Minimum wage
A floor wage which people cannot earn below
Monopolistic
competition
Where there are a large number of buyers and sellers who are
relatively small and act independently, selling non-homogeneous
goods
Monopoly
A single seller in the market
Monopsony
A single buyer in the market
N-firm concentration
ratio
The percentage of market share held by the ‘n’ biggest firms
Nationalisation
When a private sector company or industry is brought under state
control, to be owned and managed by the government
Natural monopoly
Where economies of scale are so large that not even a single
producer is able to fully exploit them; it is more efficient for there to be a monopoly than many sellers
Non-collusive
oligopoly
When firms in an oligopoly compete against each other, rather than
making agreements to reduce competition
Non-price competition
When firms compete on factors other than price, for example
customer service or quality; they aim to increase the loyalty to the
brand which makes demand more inelastic
Normal profit
The minimum reward required to keep entrepreneurs supplying their
enterprise, the return sufficient to keep the factors of production
committed to the business; TC=TR
Not-for-profit business
Where firms are run in order to maximise social welfare and help
individuals and groups; any profit they do make is used to support
their aims
Occupational mobility
of labour
The ease and speed at which labour can move from one type of job to
another
Oligopoly
Where a few firms dominate the market and have the majority of
market share, they act interdependently
Organic growth
Where firms grow by increasing their output
Overt collusion
Collusion where firms come to a formal agreement, for example a
cartel
Perfect competition
A market with many buyers and sellers selling homogenous goods
with perfect information and freedom of entry and exit
Perfectly contestable
market
A market with no barriers to entry, where a new firm can easily enter
and compete against incumbent firms completely equally
Predatory pricing
When a large, established firm is threatened by new entrants so sets
such a low price that other firms make losses and are driven out the
market
Price leadership
Where one firm sets prices and other firms tend to follow this firm as they are fearful of engaging in a price war
Price wars
Where firms continuously drive prices down to the point where they
are frequently making losses and firms are forced to leave
Principal-agent
problem
Where the agent makes decisions on behalf of the principal; the agent
should maximise the benefits of the principal but have the temptation
of maximising their own benefits
Private sector
The part of the economy that is owned and run by individuals or
groups of individuals
Privatisation
The sale of government equity in nationalised industries or other firms to private investors
Productive efficiency
When resources are used to give the maximum possible output at the
lowest possible cost; MC=AC
Profit maximisation
When firms produce at a point which derives the greatest profit;
MC=MR
Profit satisficing
When a firm earn just enough profit to keep its shareholders happy
Public sector
The part of the economy that is owned or controlled by local or central government
Regulatory capture
When regulators become more empathetic and are able to ‘see things from the firm’s perspective’, which removes impartiality and weakens their ability to regulate
Revenue maximisation
When firms produce at a point which derives the greatest revenue;
MR=0
Sales maximisation
When firms produce at a point where they sell as many of their goods
and services as possible without making a loss; AR=AC
Static efficiency
The level of efficiency at one point in time
Sunk cost
Costs that cannot be recovered once they have been spent
Supernormal profit
The profit above normal profit, TR>TC
Tacit collusion
Collusion where there is no formal agreement, such as price
leadership
Third degree price
discrimination
When monopolists charge different prices to different groups for the
same good or service
Total cost
The cost to produce a given level of output
total variable costs+total fixed costs
Total revenue
Revenue generated from the sale of a given level of output
price x quantity sold
Variable cost
Costs which change with output
Vertical integration
When a firm merges or takes over another firm in the same industry,
but at a different stage of production
