Theme 3 Flashcards
Allocative efficiency
When resources are allocated to the best
interests of society, where there is
maximum social welfare and maximum
utility; P=MC
Average cost/average total cost
AC/ATC
The cost of production per unit
Average revenue
The price each unit is sold for
Cartels
A formal collusive agreement where
firms enter into an agreement to mutually
set prices
Collusion
Occurs when firms agree to work
together, for example by setting a price
or fixing the quantity they produce
Competition policy
Government action to increase
competition in markets
Competitive tendering
When the government contracts out the
provision of a good or service and invites
firms to bid for the contract
Conglomerate integration
The merger of firms with no common
connection
Constant returns to scale
Output increases by the same proportion
that the inputs increase by
Contestable market
When there is the threat of new entrants
into the market, forcing firms to be
efficient
Decreasing returns to scale
An increase in inputs by a certain
proportion will lead to output increasing
by a smaller proportion
Demergers
A single business is broken into two or
more businesses to operate on their
own, to be sold or to be dissolved
Deregulation
The 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 for a related good
Diminishing marginal productivity
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
Diseconomies of scale
The disadvantages that arise in large
businesses that reduce efficiency and
cause average costs to rise
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
Divorce of ownership from control
Dynamic efficiency
Efficiency in the long run; concerned with
new technology and increases in
productivity which causes efficiency to
increase over a period of time
Economies of scale
The advantages of large scale
production that enable a large business
to produce at a lower average cost than
a smaller business
External economies of scale
An advantage which arises from the
growth of the industry within which the
firm operates, independent of the firm
itself
Fixed cost
Costs which do not vary with output
Game theory
Used to predict the outcome of a
decision made by one firm, which has
incomplete information about the other
firm
Geographical mobility of labour
The ease and speed at which labour can
move from one area to another
Horizontal integration
The merger of firms in the same industry
at the same stage of production
Increasing returns to scale
An increase in inputs by a certain
proportion will lead to an increase in
output by a larger proportion
Interdependent
The 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
When firms set prices low in order to
prevent new entrants; used in
contestable markets
Loss
When revenue does not cover costs
Marginal cost
The additional cost of producing one
extra unit of good
Marginal revenue
The additional revenue gained by selling
one extra unit of good
Maximum wage
A ceiling wage which people cannot earn above
Minimum efficient scale
The lowest level of output necessary to
fully exploit economies of scale
Minimum wage
A floor wage which people cannot earn
below
Monopolistic competition
Where there are a large number of
buyers and sellers who are relatively
small and act independently, selling
non-homogenous goods
Monopoly
A single seller in the market
Monopsony
A single buyer in the market
N-firm concentration ratio
The percentage of market share held by
the ‘n’ biggest firms
Nationalisation
When a private sector company or
industry is brought under state control, to
be owned and managed by the
government
Natural monopoly
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
Non-collusive oligopoly
When firms in an oligopoly compete
against each other, rather than making
agreements to reduce competition
Non-price competition
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
Normal Profit
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
Not-for-profit business
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
Occupational mobility of labour
The ease and speed at which labour can
move from one type of job to another
Oligopoly
Where a few firms dominate the market
and have the majority of market share,
they act interdependently
Organic growth
When firms grow by increasing their
output
Overt collusion
Collusion where firms come to a formal
agreement, for example a cartel
Perfect competition
A market with many buyers and sellers
selling homogenous goods with perfect
information and freedom of entry and exit
Perfectly contestable market
A market with no barriers to entry, where
a new firm can easily enter and compete
against incumbent firms completely
equally
Predatory pricing
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
Price leadership
Where one firm sets prices and other
firms tend to follow this firm as they are
fearful of engaging in a price war
Price wars
When firms continuously drive prices
down to the point where they are
frequently making losses and firms are
forced to leave
Principal-agent problem
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
Private sector
The part of the economy that is owned
and run by individuals or groups of
individuals
Privatisation
The sale of government equity in
nationalised industries or other firms to
private investors
Productive efficiency
When resources are used to give the
maximum possible output at the lowest
possible cost; MC=AC
Profit maximisation
When firms produce at a point which
derives the greatest profit; MC=MR
Profit satisficing
When a firm earn just enough profit to
keep its shareholders happy
Public sector
The part of the economy that is owned
and controlled by local or central
government
Regulatory capture
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
Revenue maximisation
When firms produce at a point which
derives the greatest revenue; MR=0
Sales maximisation
When firms produce at a point where
they sell as many of their goods and
services as possible without making a
loss; AR=AC
Static efficiency
The level of efficiency at one point in
time
Sunk costs
Costs that can’t be recovered once they
have been spent
Supernormal profit
The profit above normal profit, TR>TC
Tacit collusion
Collusion where there is no formal
agreement, such as price leadership
Third degree price discrimination
When monopolists charge different
prices to different groups for the same
good or service
Total cost (TC)
The cost to produce a given level of
output
Total revenue (TR)
Revenue generated from the sale of a
given level of output
Variable costs
Costs which change with output
Vertical integration
When a firm merges or takes over
another firm in the same industry, but at
a different stage of production
X-inefficiency
When firms produce at a cost above the
AC curve
