Theme 3: Business Behaviour and the Labour Market Flashcards
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
Where one party has more information than the other, leading to market failure and causing problems for regulators
Average cost/average total cost (AC/ATC)
The cost of production per unit
total costs / quantity produced
Average revenue (AR)
The price each unit is sold for
TR / quantity sold
Bilateral monopoly
Where 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
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
Conglomerate
integration
The merger of firms with no common connection
Contestable market
When there is the threat of new entrants into the market, forcing firms to be efficient
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
Divorce of ownership from control
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
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
Fixed cost
Costs which do not vary with output
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
Interdependent
The actions of one firm directly affects another firm
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 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-homogeneous 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
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
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
Where firms grow by increasing their output
Perfect competition
A market with many buyers and sellers selling homogenous goods with perfect information and freedom of entry and exit
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 wars
Where 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
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
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
Sunk cost
Costs that cannot 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
The cost to produce a given level of output total variable costs + total fixed costs
Total revenue
Revenue generated from the sale of a given level of output
price x quantity sold
Variable cost
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
