definitions theme 3 Flashcards
what is allocative efficiency
resources are allocated to the best interests of society, with max social welfare and utility
P=MC
what is AC
cost of production per unit:
TC
/
Quantity produced
what is AR
the price each unit is sold for
TR
/
Quantity sold
what is a bilateral monopoly
where there is only one buyer and one seller in the market
what is a cartel
a formal collusive agreement where firms enter into an agreement to mutually set prices
what is collusion
occurs when firms agree to work together, eg by setting a price or fixing their quantity produced
what is competitive tendering
when the government contracts out the provision of a good or service and invites firms to bid for the contract
what is a conglomerate integration
the merger of firms with no common connection
what’re constant returns to scale
output increases by the same proportion that the inputs increase by
what is a contestable market
when there is the threat of new entrants into the market, forcing firms to be efficient
what’re decreasing returns to scale
an increase in inputs by a certain proportion will lead to output increasing by a smaller proportion
what is derived demand
the demand for 1 good is linked to the demand for a related good
what is 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
what is diseconomies of scale
the disadvantages that arise in large businesses that reduce efficiency and cause average costs to rise
what is the principal agent problem also known as
divorce of ownership from control, whereby firms are owned by shareholders who have little say in the day-to-day running of the business
what is dynamic efficiency
efficiency in the long run; eg new technology and increases in productivity which causes efficiency to increase over a period of time
what’re external EoS
an advantage which arises from growth of the industry within which a firm operates, independent of the firm itself
what’re fixed costs
costs which do not vary with output
what is game theory
used to predict the outcome of a decision made by one firm, when it had incomplete information about the other
what is interdependence
the actions of 1 firm directly affects another firm
what is internal economies of scale
an advantage a firm has because of growth in the firm, independent to other firms or the general industry
what is limit pricing
firms setting low prices in order to prevent new entrants
what is is marginal cost/revenue
the additional cost/revenue from producing/selling an extra unit of good
what is the minimum efficient scale
the lowest level of output necessary to fully exploit Eos
what is monopolistic competition
where there are a large number of buyers and sellers who are relatively small and act independently, selling differentiated goods
what is a monopoly/monopsony
a single seller/buyer in the market
what is non-price competition
competition by firms on factors other than price, eg customer service or quality; aiming to increase the loyalty to the brand which makes demand more inelastic
what is normal profit
the minimum reward required to keep firms supplying their enterprise, TC=TR
what is occupational mobility of labour
the ease/speed at which labour can move from 1 job type to another
what is overt collusion
collusion as a result of a formal agreement, eg a cartel
what are the characteristics of perfect competition
a market with many buyers and sellers, homogenous goods, perfect information and no entry/exit barriers
what are the characteristics of a perfectly contestable matket
a market with no entry barriers, where a firm can easily enter and compete against incumbent firms completely equally
what is predatory pricing
when a large firm sets a low price that other new entrant firms make losses and are driven out of the market
what is the difference between limit and predatory pricing
limit pricing is used by the existing supplier to restrict new entrants currently out of the market; predatory is what a supplier used to out the other existing market suppliers
what is price leadership
where a firm sets prices and other firms tend to follow this as they are fearful of engaging in a price war
what is the private sector
the part of the economy owned/run by individuals/groups of individuals
what is productive efficiency
MC=AC, when resources are used for the max output at the lowest cost
what is profit satisficing
when a firm earns just enough profit to keep its shareholders happy
what’re consumer characteristics
rational consumption
utility satisficers
some inertia?
what is the public sector
the part of the economy owned/controlled by local or central government
what is regulatory capture
when regulators become too empathetic to firms they’re regulating, removing their impartiality and weakens their ability to regulate
what is revenue maximisation
when firms produce at the point giving the most revenue
MR=0
what is sales maximisation
when firms produce where they sell as many goods/services as possible without making a loss
AR=AC
what is static efficiency
the level of efficiency at one point in time
what’re sunk costs
costs which cannot be recovered once spent
what is tacit collusion
collusion where there is no formal agreement, eg price leadership
what is the TR and TC formulae
TR= P x QS
TC = TVC + TFC
what is vertical integration
when a firm merges/takes over a firm in the same industry but at a different stage of production
what is x-inefficiency
when firms produce at a cost above the AC curve
what’re diminishing returns of labour
as businesses increase the amount of one input factor (eg labour) while keeping other inputs constant, the MRP of that input will eventually decrease
what is the difference between deregulation and privatisation
privatisation: transfer of ownership and control of government owned industries to the private sector
deregulation: the removal/relaxation of government regulations on industries and markets.
