Theme 3 Flashcards
Average revenue (AR)
Price per unit sold
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
When one party possess more information than another - this can lead to market failures and causes problems for regulators
Average cost/average
total cost (AC/ATC)
Cost of production per unit
Bilateral monopoly
When 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
When two or more firms work together and agree to set the price or output levels
Competition policy
Government action to increase competition in the market
Competitive tendering
When the government contracts out the provision of a good or service and invites firms to bid for the contract
Conglomerate
integration
A merger between firms with unrelated business activities
Constant returns to
scale
The proportion of the increase in outputs is the same as the proportion increase in inputs
Contestable market
Forces firms to be more efficient as there is the threat of the entry of new firms
Decreasing returns to
scale
An increase in the proportion of inputs leads to a smaller increase in the proportion of outputs
Demerger
When a firm gets broken down into two or more separate firms to operate on their own, to be sold or to be dissolved
Deregulation
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 of a related good
Diminishing marginal
productivity
if more variable input units are used along with a certain amount of fixed inputs, the overall output might grow at a faster rate initially, then at a steady rate, but ultimately, it will grow at a declining rate
Diseconomies of scale
when a company or business grows so large that the cost per unit increase - increase in costs when output is increased
Divorce of ownership
from control
refers to the scenario where a company’s ownership and management control lie in entirely different hands. In simple terms, those who own a company (the shareholders) aren’t the same people making daily business decisions (the managers or directors).
Dynamic efficiency
involves improving allocative and productive efficiency over time. This can mean developing new or better products and finding better ways of producing goods and services
Economies of scale
Economies of scale are cost advantages reaped by companies when production becomes efficient. Companies can achieve economies of scale by increasing production and lowering costs. This happens because costs are spread over a larger number of goods.
External economies of
scale
External economies of scale occur when a whole industry grows larger and firms benefit from lower long-run average costs
Fixed cost
Costs that do not vary with output
Geographical mobility
of labour
The ease and speed at which workers can move from one type job to another
Horizontal integration
A merger between firms within the same industry and at the same stage of the production process
Game theory
Used to predict the outcome
Increasing returns to
scale
A increase in the proportion of inputs by a certain proportion leads to a larger increase in the proportion of outputs
Interdependent
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
Setting the price low so that new entrants are prevented from entering the market (used in contestable markets)
Loss
When revenue does not cover costs
Marginal revenue
The additional revenue gained by selling one extra unit of a good
Marginal cost
The additional cost of producing one extra unit of a good
Maximum wage
The ceiling wage people cannot earn above
Minimum efficient
scale
Lowest level of output necessary to fully exploit economics of scale
Minimum wage
The floor wage where no one can earn below
Monopolistic
competition
Large number of buyers and sellers that are relatively small selling non-homogenous goods
Monopoly
A single seller in the market
N-firm concentration
ratio
a common measure of market structure and shows the combined market share of the n largest firms in the market
Nationalisation
the process of taking privately-controlled companies, industries, or assets and putting them under the control of the government
Non-collusive
oligopoly
the situation where the firms compete with each other and follow their own price and quantity and output policy independent of its rival firms
Non-price competition
Non-price competition involves ways that firms seek to increase sales and attract custom through methods other than price. Non-price competition can include quality of the product, unique selling point, superior location and after-sales service
Normal profit
Where total costs are equal to total revenue (break-even point)
Not-for-profit business
Where firms are run to maximise social welfare and help individuals and groups (any profit made is used to support their aims)
Occupational mobility
of labour
refers to the ease with which a worker can leave one job for another in a different field
Oligopoly
Small number of dominant firms who have the majority of the market share, they act interdependently.
Organic growth
When firms grow by increasing their output
Overt collusion
Collusion where firms come into an agreement e.g. cartels
Perfect competition
Perfectly contestable
market
Predatory pricing
Pricing goods and services lower in order to drive competition out of the market
Price leadership
The dominant firm who sets the price within the market so other smaller firms follow
Price wars
occurs when two or more rival companies lower the prices of their products or services with the goal of stealing customers from their competitors or gaining market share
Private sector
the part of a country’s economic system that is run by individuals and companies, rather than a government entity
Principal-agent
problem
Shareholders having conflict with managers who have different aims within the firm
Productive efficiency
The point where average cost is at its lowest
Profit maximisation
The point where a firm see itself make the highest possible profit
Profit satisficing
Providing just enough profit to shareholders in order to satisfy them
Public sector
The Government is in charge of providing goods and services within this sector
Regulatory capture
Regulatory capture is a form of government failure. It happens when a government agency operates in favour of producers rather than consumers
Sales maximisation
supplying the largest output possible consistent with earning at least normal profits where average revenue = average cost (AR=AC).
Static efficiency
The level of efficiency at a point in time
Sunk cost
Costs that cannot be recovered once they have been spent
Tacit collusion
When firms don’t explicitly work together but act in ways that suggest they are working together.
Supernormal profit
The profit above normal profit (excess profit)
Third degree price
discrimination
Charging different prices to different groups of people for the same good/service
Total cost
The cost to produce a given level of output
Total revenue
Revenue generated from a sale of a given level output
Variable cost
Costs that vary with output
Vertical integration
A merger or takeover of a firm in the same industry but at a different stage of production
X-inefficiency
When firms produce at a cost above the AC curve
