Microeconomic Year 2 Definitions Flashcards
Profit Maximisation
MC=MR
Sales Revenue Maximisation
MR=0
Sales Volume Maximisation
AC=AR
Growth Maximisation
A firm produces at a loss in the short term (AC>AR) to maximise market share growth
Principal-Agent Problem
Conflict between the objectives of the principals and their agents, who take decisions on their behalf
Principals
Business owners
Agents
Managers running a business on shareholders’ behalf
Social Welfare
A firm existing to benefit wider society
Corporate Social Responsibility
A firm acting to benefit wider society, the community or their employees
Profit Satisficing
Managers doing just enough to satisfy shareholders by producing satisfactory profits
Short Run
The period in which at least one factor of production is fixed in supply
Long Run
The period in which the firm is able to vary the inputs of all factors of production
Sunk Costs
Costs incurred by a firm that cannot be recovered if the firm ceases trading
Minimum Efficient Scale
Level of output at which long-run average costs stop falling as output increases
Economic Costs
Total cost + Opportunity cost
Perfect Competition
Market structure that produces allocative and productive efficiency in the long-run equilibrium
Price Taker
A firm that must accept whatever price is set in the market as a whole
Allocative Efficiency
Achieved when consumer satisfaction is maximised. e.g. MC=MB, S=D, P=MC
Productive Efficiency
A firm operates at a minimum average total cost, choosing an appropriate combination of inputs (cost efficiency) and producing the maximum output possible from those inputs (technical efficiency). e.g. Bottom of AC curve
Homogenous Product
Products are seen as identical by consumers, there is no brand loyalty, so all products are perfect substitutes
Perfect Knowledge
Buyers and firms know prices charged by other prices, and no firm has a superior production technique
Monopoly - Monopoly
Form of market structure in which only one seller of a good or service
Monopoly - Perfect/First-Degree Price Discrimination
A monopoly firm is able to charge each consumer a different price
Monopoly - Arbitrage
Process which prices in two market segments will be equalised as a result of purchase and resale by market participants
Monopoly - Dynamic Efficiency
Lowering the position of the AC curve over time by improving production processes
Monopoly - X-Inefficiency
Actual average cost is above the AC curve due to lack of competitive pressure
Monopoly - Second-Degree Price Discrimination
Lower prices are charged when larger quantities are bought
Monopoly - Third-Degree Price Discrimination
Firm charges different prices for the same product to different market segments
Natural Monopoly - Natural Monopoly
Monopoly that arises in an industry in which there are such substantial economies of scale that only one firm is viable
Natural Monopoly - Nationalisation
Where a privately owned firm or industry is taken into public ownership
Natural Monopoly - Privatisation
Where an enterprise in public ownership is returned to private ownership
Monopolistic Competition - Monopolistic Competition
A market that shares some characteristics of monopoly and some of perfect competition
Monopolistic Competition - Product Differentiation
A strategy firms adopt that marks their product as being different from their competitors’
Contestable Markets - Contestable Markets
A market in which the existing firm makes only normal profits, as it cannot set a price higher than average cost without attracting entry, owing to the absence of barriers to entry and sunk costs
Contestable Markets - Sunk Costs
Costs incurred by a firm entering the market that cannot be recovered if the firm ceases trading
Contestable Markets - Hit-And-Run Entry
Where a firm enters a market to take short-run supernormal profits knowing it can exit without incurring costs
Oligopoly - Oligopoly
A market with a few dominant sellers, in which each firm must take account of the behaviour and likely behaviour of rival firms in the industry
Oligopoly - Non-Price Competition
A strategy whereby firms compete by advertising to encourage brand loyalty, or by quality or design, rather than on price
Oligopoly - Tacit Collusion
A situation occurring when firms refrain from competing on price, but without communication or formal agreement between them
Demand For Labour - Derived Demand
Where the demand for a factor of production or good derives not from the factor or good itself, but from the goods or services that it provides
Demand For Labour - Marginal Revenue Product Of Labour ( MRPL )
The additional revenue received by a firm as it increases output by using an additional unit of labour input.
MRPL = MPPL * MR
Demand For Labour - Marginal Revenue Product Theory
A theory which argues that the demand for labour depends upon balancing the revenue that a firm gains from employing an additional unit of labour against the marginal cost of that unit of labour
Labour Supply - Non-Pecuniary Benefits
Benefits offered to workers by firms that are not financial in nature
Labour Supply - Transfer Earnings
The minimum payment required to keep a factor of production in its present use
Labour Supply - Economic Rent
A payment received by a factor of production over and above what would be needed to keep it in its present use
Interaction of Labour Markets - Monopsony
A market in which there is a single buyer of a good, service or factor of production
Interaction of Labour Markets - Trade Union
An organisation of workers that negotiates with employers on behalf of its members
Interaction of Labour Markets - Bilateral Monopoly
A situation in which a monopoly seller of labour faces a monopsony buyer of labour
