Key terms 3.4

Question 1

Define Allocative Efficiency

Answer 1

When scarce resources are used to satisfy consumer preferences to maximise their welfare

Question 2

Define productive efficiency

Answer 2

When production is achieved at the lowest average cost with the fewest possible resources

Question 3

Define Dynamic efficiency

Answer 3

When resources are allocated efficiency over time ongoing innovation of production and product techniques

Question 4

Define X-inefficiency

Answer 4

When firms aren’t operating at their optimal level of efficiency due to internal factors e.g. lack of motivation

Question 5

Define Heterogeneous products

Answer 5

These are products that differentiate from on another that consumers can tell the difference/have different perspectives

Question 6

Homogeneous products

Answer 6

Products that are identical

Question 7

Define Barriers to entry

Answer 7

Factors that make it difficult impossible for firms to enter an industry and compete with existing firms

Question 8

Non-price competition

Answer 8

A marketing strategy involving firms seeking to attract sales, through methods other than price e.g. quality

Question 9

Define Perfect competition

Answer 9

Where people have perfect knowledge of a market and products. This allows them to make the best choice

Question 10

Define Price searcher

Answer 10

Firms that set their own prices for their goods and services in the market since they have a larger market share

Question 11

Define price taker

Answer 11

Firms that accept the current market price and do not deviate from it, lacking the market power to influence the market

Question 12

Define Perfect competition

Answer 12

A market structure where there are many buyers & sellers, no barriers to entry/exit, perfect knowledge and homogenous products

Question 13

Monopolistic competition

Answer 13

A market structure large numbers of firms produce differentiated products and where there are low barriers to entry & exit

Question 14

Define Oligopoly

Answer 14

A form of imperfect competition where a few dominate firms dominate the market. There are high entry/exit barriers, interdependence and imperfect information

Question 15

Define Price rigidity

Answer 15

The tendency market prices to be resistant to change

Question 16

Define interdependence

Answer 16

The few competitors in an oligopoly look at each others behaviors to decide how to act themselves

Question 17

Define 3-Firm concentration ratios

Answer 17

The % of total market share the 3 biggest firms in a market have

Question 18

Define Game Theory

Answer 18

A mathematical framework which is used by firms to ensure optimal decisions are made in a strategic setting where there is interdependence

Question 19

Define Overt collusion

Answer 19

When firm explicitly agree to limit competition or raise prices e.g cartels

Question 20

Define Tacit collusion

Answer 20

When firms avoid formal agreement but closely monitor each other behaviour, usually following the lead of the largest firm in the industry

Question 21

Define Cartel

Answer 21

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.

Question 22

Define Price Leadership

Answer 22

Occurs when firms monitor the price of the largest firm in the industry -> adjust their prices to match

Question 23

Define Price wars

Answer 23

A competitive exchange among rivals in a market who lower their prices in an attempt to underrate each other and gain increased market share

Question 24

Define Predatory pricing

Answer 24

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.

Question 25

Limit pricing

Answer 25

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

Question 26

Define Monopoly

Answer 26

A market structure in which there is one single firm, high entry barriers and supernormal profits in the long run

Question 27

Define Monopoly power

Answer 27

A firm that has more than 25% market share

Question 28

Define Natural Monopoly

Answer 28

A type of monopoly in an industry or sector with high barriers to entry and start-up costs that prevent any rivals from competing

Question 29

Define 1st degree price discrimination

Answer 29

When firms charge consumers the maximum price that they are willing and able to pay for a products

Question 30

Define Price discrimination

Answer 30

The act of charging a different price for the same goods in different markets

Question 31

2nd degree price discrimination

Answer 31

When firms charge customers a different price for the amount/quantity consumed

Question 32

3rd degree price discrimination

Answer 32

When firms charge customers a different price according to market segments

Question 33

Define Monopsony

Answer 33

A monopsony is characterized by a single dominant buyer in a particular market or industry

Question 34

Define Contestable market