Key terms 3.4 Flashcards
Define Allocative Efficiency
When scarce resources are used to satisfy consumer preferences to maximise their welfare
Define productive efficiency
When production is achieved at the lowest average cost with the fewest possible resources
Define Dynamic efficiency
When resources are allocated efficiency over time ongoing innovation of production and product techniques
Define X-inefficiency
When firms aren’t operating at their optimal level of efficiency due to internal factors e.g. lack of motivation
Define Heterogeneous products
These are products that differentiate from on another that consumers can tell the difference/have different perspectives
Homogeneous products
Products that are identical
Define Barriers to entry
Factors that make it difficult impossible for firms to enter an industry and compete with existing firms
Non-price competition
A marketing strategy involving firms seeking to attract sales, through methods other than price e.g. quality
Define Perfect competition
Where people have perfect knowledge of a market and products. This allows them to make the best choice
Define Price searcher
Firms that set their own prices for their goods and services in the market since they have a larger market share
Define price taker
Firms that accept the current market price and do not deviate from it, lacking the market power to influence the market
Define Perfect competition
A market structure where there are many buyers & sellers, no barriers to entry/exit, perfect knowledge and homogenous products
Monopolistic competition
A market structure large numbers of firms produce differentiated products and where there are low barriers to entry & exit
Define Oligopoly
A form of imperfect competition where a few dominate firms dominate the market. There are high entry/exit barriers, interdependence and imperfect information
Define Price rigidity
The tendency market prices to be resistant to change
Define interdependence
The few competitors in an oligopoly look at each others behaviors to decide how to act themselves
Define 3-Firm concentration ratios
The % of total market share the 3 biggest firms in a market have
Define Game Theory
A mathematical framework which is used by firms to ensure optimal decisions are made in a strategic setting where there is interdependence
Define Overt collusion
When firm explicitly agree to limit competition or raise prices e.g cartels
Define Tacit collusion
When firms avoid formal agreement but closely monitor each other behaviour, usually following the lead of the largest firm in the industry
Define Cartel
A cartel is a group of two or more firms which have agreed to control prices, limit output, or prevent the entrance of new firms into the market.
Define Price Leadership
Occurs when firms monitor the price of the largest firm in the industry -> adjust their prices to match
Define Price wars
A competitive exchange among rivals in a market who lower their prices in an attempt to underrate each other and gain increased market share
Define Predatory pricing
Occurs when a firm sells a good or service at a price below cost (or very cheaply) with the intention of forcing rival firms out of business.
Limit pricing
When firms sacrifice short term profits by pricing goods at such a low price that it would be unprofitable for other firms to enter the marketplace
Define Monopoly
A market structure in which there is one single firm, high entry barriers and supernormal profits in the long run
Define Monopoly power
A firm that has more than 25% market share
Define Natural Monopoly
A type of monopoly in an industry or sector with high barriers to entry and start-up costs that prevent any rivals from competing
Define 1st degree price discrimination
When firms charge consumers the maximum price that they are willing and able to pay for a products
Define Price discrimination
The act of charging a different price for the same goods in different markets
2nd degree price discrimination
When firms charge customers a different price for the amount/quantity consumed
3rd degree price discrimination
When firms charge customers a different price according to market segments
Define Monopsony
A monopsony is characterized by a single dominant buyer in a particular market or industry
Define Contestable market
