Theme 3: Business Behaviour and the Labour Market

Question 1

Allocative efficiency

Answer 1

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

Question 2

Asymmetric information

Answer 2

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

Question 3

Average cost/average total cost (AC/ATC)

Answer 3

The cost of production per unit
total costs / quantity produced

Question 4

Average revenue (AR)

Answer 4

The price each unit is sold for
TR / quantity sold

Question 5

Bilateral monopoly

Answer 5

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

Question 6

Cartels

Answer 6

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

Question 7

Collusion

Answer 7

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

Question 8

Competition policy

Answer 8

Government action to increase competition in markets

Question 9

Conglomerate
integration

Answer 9

The merger of firms with no common connection

Question 10

Contestable market

Answer 10

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

Question 11

Demergers

Answer 11

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

Question 12

Deregulation

Answer 12

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

Question 13

Derived demand

Answer 13

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

Question 14

Diminishing marginal
productivity

Answer 14

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

Question 15

Diseconomies of scale

Answer 15

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

Question 16

Divorce of ownership from control

Answer 16

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

Question 17

Dynamic efficiency

Answer 17

Efficiency in the long run; concerned with new technology and increases in productivity which causes efficiency to increase over a period of time

Question 18

Economies of scale

Answer 18

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

Question 19

Fixed cost

Answer 19

Costs which do not vary with output

Question 20

Geographical mobility of labour

Answer 20

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

Question 21

Horizontal integration

Answer 21

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

Question 22

Interdependent

Answer 22

The actions of one firm directly affects another firm

Question 23

Marginal cost

Answer 23

The additional cost of producing one extra unit of good

Question 24

Marginal revenue

Answer 24

The additional revenue gained by selling one extra unit of good

Question 25

Maximum wage

Answer 25

A ceiling wage which people cannot earn above

Question 26

Minimum wage

Answer 26

A floor wage which people cannot earn below

Question 27

Monopolistic competition

Answer 27

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

Question 28

Monopoly

Answer 28

A single seller in the market

Question 29

Monopsony

Answer 29

A single buyer in the market

Question 30

N-firm concentration ratio

Answer 30

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

Question 31

Non-price competition

Answer 31

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

Question 32

Normal profit

Answer 32

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

Question 33

Occupational mobility of labour

Answer 33

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

Question 34

Oligopoly

Answer 34

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

Question 35

Organic growth

Answer 35

Where firms grow by increasing their output

Question 36

Perfect competition

Answer 36

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

Question 37

Predatory pricing

Answer 37

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

Question 38

Price wars

Answer 38

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

Question 39

Principal-agent problem

Answer 39

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

Question 40

Productive efficiency

Answer 40

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

Question 41

Profit maximisation

Answer 41

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

Question 42

Profit satisficing

Answer 42

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

Question 43

Revenue maximisation

Answer 43

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

Question 44

Sales maximisation

Answer 44

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

Question 45

Sunk cost

Answer 45

Costs that cannot be recovered once they have been spent

Question 46

Supernormal profit

Answer 46

The profit above normal profit, TR>TC

Question 47

Tacit collusion

Answer 47

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

Question 48

Third degree price discrimination

Answer 48

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

Question 49

Total cost

Answer 49

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

Question 50

Total revenue

Answer 50

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

Question 51

Variable cost

Answer 51

Costs which change with output

Question 52

Vertical integration

Answer 52

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

Question 53

X-inefficiency

Answer 53

When firms produce at a cost above the AC curve