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Economics key terms > Theme 3 > Flashcards

Theme 3 Flashcards

1
Q

Allocative efficiency

A

When resources are allocated to the best interests of society, when
there is maximum social welfare and maximum utility; P=MC

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2
Q

Asymmetric
information

A

Where one party has more information than the other, leading to
market failure and causing problems for regulators

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3
Q

Average cost/average
total cost (AC/ATC)

A

The cost of production per unit
total costs
quantity produced

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4
Q

Average revenue (AR)

A

The price each unit is sold for
TR
quantity sold

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5
Q

Bilateral monopoly

A

Where there is only one buyer and one seller in the market

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6
Q

Cartels

A

A formal collusive agreement where firms enter into an agreement to
mutually set prices

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7
Q

Collusion

A

Occurs when firms agree to work together, for example by setting a
price or fixing the quantity they produce

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8
Q

Competition policy

A

Government action to increase competition in markets

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9
Q

Competitive tendering

A

When the government contracts out the provision of a good or service
and invites firms to bid for the contract

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10
Q

Conglomerate
integration

A

The merger of firms with no common connection

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11
Q

Contestable market

A

When there is the threat of new entrants into the market, forcing firms
to be efficient

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11
Q

Constant returns to
scale

A

Output increases by the same proportion that the inputs increase by

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12
Q

Decreasing returns to
scale

A

An increase in inputs by a certain proportion will lead to output
increasing by a smaller proportion

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13
Q

Demergers

A

A single business is broken into two or more businesses to operate on
their own, to be sold or to be dissolved

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14
Q

Deregulation

A

The removal of legal barriers to allow private enterprises to compete
in a previously protected market

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15
Q

Derived demand

A

The demand for one good is linked to the demand for a related good

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16
Q

Diminishing marginal
productivity

A

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

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17
Q

Diseconomies of scale

A

The disadvantages that arise in large businesses that reduce
efficiency and cause average costs to rise

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18
Q

Divorce of ownership
from control

A

Firms are owned by shareholders, who have little say in the day to
day running of the business, and controlled by managers; this leads to
the principal-agent problem

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19
Q

Dynamic efficiency

A

when all resources are allocated efficiently over time, and the rate of innovation is at the optimum level, which leads to falling long run average costs. The market is dynamically efficient if consumer needs and wants are met as time goes on.

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20
Q

Economies of scale

A

The advantages of large scale production that enable a large
business to produce at a lower average cost than a smaller business

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21
Q

External economies of
scale

A

An advantage which arises from the growth of the industry within
which the firm operates, independent of the firm itself

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22
Q

Fixed cost

A

Costs which do not vary with output

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23
Q

For-profit business

A

A business whose main aim is to make money

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24
Q

Game theory

A

Used to predict the outcome of a decision made by one firm, when it
has incomplete information about the other firm

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25
Q

Geographical mobility
of labour

A

The ease and speed at which labour can move from one area to
another

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26
Q

Horizontal integration

A

The merger of firms in the same industry at the same stage of
production

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27
Q

Increasing returns to
scale

A

An increase in inputs by a certain proportion will lead to an increase in
output by a larger proportion

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28
Q

Interdependent

A

The actions of one firm directly affects another firm

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29
Q

Internal economies of
scale

A

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

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30
Q

Limit pricing

A

When firms set prices low in order to prevent new entrants; used in
contestable markets

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31
Q

Loss

A

When revenue does not cover costs

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32
Q

Marginal cost

A

The additional cost of producing one extra unit of good

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33
Q

Marginal revenue

A

The additional revenue gained by selling one extra unit of good

34
Q

Maximum wage

A

A ceiling wage which people cannot earn above

35
Q

Minimum efficient
scale

A

The lowest level of output necessary to fully exploit economies of
scale

36
Q

Minimum wage

A

A floor wage which people cannot earn below

37
Q

Monopolistic
competition

A

Where there are a large number of buyers and sellers who are
relatively small and act independently, selling non-homogeneous
goods

38
Q

Monopoly

A

A single seller in the market

39
Q

Monopsony

A

A single buyer in the market

40
Q

N-firm concentration
ratio

A

The percentage of market share held by the ‘n’ biggest firms

41
Q

Nationalisation

A

When a private sector company or industry is brought under state
control, to be owned and managed by the government

42
Q

Natural monopoly

A

Where economies of scale are so large that not even a single
producer is able to fully exploit them; it is more efficient for there to be
a monopoly than many sellers

43
Q

Non-price competition

A

When firms compete on factors other than price, for example
customer service or quality; they aim to increase the loyalty to the
brand which makes demand more inelastic

44
Q

Non-collusive
oligopoly

A

When firms in an oligopoly compete against each other, rather than
making agreements to reduce competition

45
Q

Normal profit

A

The minimum reward required to keep entrepreneurs supplying their
enterprise, the return sufficient to keep the factors of production
committed to the business; TC=TR

46
Q

Not-for-profit business

A

Where firms are run in order to maximise social welfare and help
individuals and groups; any profit they do make is used to support
their aims

47
Q

Occupational mobility
of labour

A

The ease and speed at which labour can move from one type of job to
another

48
Q

Oligopoly

A

Where a few firms dominate the market and have the majority of
market share, they act interdependently

49
Q

Organic growth

A

Where firms grow by increasing their output

50
Q

Overt collusion

A

Collusion where firms come to a formal agreement, for example a
cartel

51
Q

Perfectly contestable
market

A

A market with no barriers to entry, where a new firm can easily enter
and compete against incumbent firms completely equallyA market with no barriers to entry, where a new firm can easily enter
and compete against incumbent firms completely equally

51
Q

Perfect competition

A

A market with many buyers and sellers selling homogenous goods
with perfect information and freedom of entry and exit

52
Q

Predatory pricing

A

When a large, established firm is threatened by new entrants so sets
such a low price that other firms make losses and are driven out the
market

53
Q

Price leadership

A

Where one firm sets prices and other firms tend to follow this firm as
they are fearful of engaging in a price war

54
Q

Price wars

A

Where firms continuously drive prices down to the point where they
are frequently making losses and firms are forced to leave

55
Q

Principal-agent
problem

A

Where the agent makes decisions on behalf of the principal; the agent
should maximise the benefits of the principal but have the temptation
of maximising their own benefits

56
Q

Privatisation

A

The sale of government equity in nationalised industries or other firms
to private investors

56
Q

Private sector

A

The part of the economy that is owned and run by individuals or
groups of individuals

57
Q

Productive efficiency

A

When resources are used to give the maximum possible output at the
lowest possible cost; MC=AC

58
Q

Profit maximisation

A

When firms produce at a point which derives the greatest profit;
MC=MR

59
Q

Profit satisficing

A

When a firm earn just enough profit to keep its shareholders happy

60
Q

Public sector

A

The part of the economy that is owned or controlled by local or central
government

61
Q

Regulatory capture

A

When regulators become more empathetic and are able to ‘see things
from the firm’s perspective’, which removes impartiality and weakens
their ability to regulate

62
Q

Revenue maximisation

A

When firms produce at a point which derives the greatest revenue;
MR=0

63
Q

Sales maximisation

A

When firms produce at a point where they sell as many of their goods
and services as possible without making a loss; AR=AC

64
Q

Static efficiency

A

The level of efficiency at one point in time

65
Q

Sunk cost

A

Costs that cannot be recovered once they have been spent

66
Q

Supernormal profit

A

The profit above normal profit, TR>TC

67
Q

Tacit collusion

A

Collusion where there is no formal agreement, such as price
leadership

68
Q

Third degree price
discrimination

A

When monopolists charge different prices to different groups for the
same good or service

69
Q

Total cost

A

The cost to produce a given level of output
total variable costs+total fixed costs

70
Q

Total revenue

A

Revenue generated from the sale of a given level of output
price x quantity sold

71
Q

Variable cost

A

Costs which change with output

72
Q

Vertical integration

A

When a firm merges or takes over another firm in the same industry,
but at a different stage of production

73
Q

X-inefficiency

A

When firms produce at a cost above the AC curve

74
Q

Point of profit max

A

Mc=mr

75
Q

Point of loss minimising

A

Mc=mr

76
Q

Point of revenue max

A

Mr=0

77
Q

Point of sales max

A

Ac=ar

78
Q

Total rev calculation

A

Price x quantity

79
Q

Ar formula

A

Tr divided by quantity

80
Q

Mr formula

A

^tr divided by ^quantity

Economics key terms (4 decks)

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