Theme 3 definitions 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 others, leading to market failure and causing problems for regulators
Average cost/ average total cost
The cost of production per unit or total cost of quantity produced
Average revenue
The price each unit is sold for
Bilateral monopoly
Where there is only one buyer and one seller in the market (e.g presence of trade union and monopsony for employers)
Cartels
Formal collusive agreements where firms agree to mutually set prices
Collusion
Occurs when firms agree to work together to set a fixed price or 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 on contracts
Conglomerate integration
The integration of firms with no common connection
Constant returns to scale
Output increases by the same proportion that the input increases by (EOS diagram)
Contestable market
When there is the constant 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 be operated 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 where each extra unit of the variable factor will produce less output than the previous unit; after a certain point marginal output fall
e.g land and labour
Diseconomies of scale
The disadvantage that arises in larger businesses that reduce efficiency and cause average cost to rise (high output, high average cost)
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 mangers; this lead to the principle-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
(high output, low AC)
External EOS
An advantage which arises from the growth of the industry within which the firm operates, independent of the firm itself
Fixed cost
Cost that does not change with output
For-profit business
A business whose main aim is to make money
Game theory
Used to predict the outcome of a decision made by one firm when it has incomplete information about the other firm
Geographical mobility of labour
The ease and speed at which labour can move from one location to another
Horizontal integration
The merger of firms in the same industry at the same stage of production
Increasing return to scale
An increase input by a certain proportion will lead to an even greater in increase of output
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 the cost
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 wage ceiling placed below equilibrium which people cannot earn above
Minimum efficient scale
The lowest level of output necessary to fully exploit EOS
Minimum wage
A wage floor set above equilibrium 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 dominant seller in the market
Monopsony
A single dominant buyer in the market
N-firm concentration ratio
The percentage of market share held by the ‘n’ biggest firms
Nationalisation
The transfer of assets from the private to public sector
Natural monopoly
Where EOS are so large that not even a single producer could 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 make agreements to reduce competition
Normal profit
The minimum reward required to keep businesses running, it covers the cost of factor of production and opportunity cost (found at AR=AC) occurs mostly in long run when markets have low barriers of entry and exit
Non-price competition
When factors other than price are used like customer service or quality; they aim to increase loyalty to their brand which makes demand more inelastic
Not-for-profit businesses
Firms that aim to maximise social welfare
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 majority of market share; they act interdependently
Organic growth
Where firms grow by increasing their output
Overt collusion
Collusion where firms come to formal agreement like cartels
Perfect competition
A market with many buyers and sellers selling homogenous goods with perfect information and no/low barriers to entry
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 set such low prices that others firms make losses and are driven out of the market (anti-competitive behaviour which is illegal)
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
Where firms continuously drive prices down to the point of frequently making losses and firms are forced to leave the market
Principal agent problem
Where the agent makes decisions on behalf of the principal; the agent should maximise the benefits of the principals but have the temptation to maximise their own benefits
Private sector
The part of the economy that is owned and run by individuals or groups of individuals
Privitisation
The transfer of assets from the public sector to private sector
Productive efficiency
When resources are used to give the maximum possible output and lowest possible cost (AC=MC)
Profit maximisation
Common business objective, where firms produce at a point which derives the greatest profit; output set at MC =MR
Profit satisficing
When a firm earns just enough profits to keep its share holders happy
Public sector
The part of the economy that is owned or 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
Output set at MR=0, when firms produce at a point which derives the greatest revenue
Sales maximisation
Output set at AC=AR, when firms produce at where they can sell as many of their goods without making a loss
Static efficiency
The level of efficiency at a given point at a given time
Sunk cost
Cost that cannot be recovered once spent e.g capital and advertisement
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 the total varibale cost + total fixed cost
Total revenue
Price * quantity sold
variable cost
cost that changes with output
Vertical integration
When a firm merges or takes over another firm in the same industry but different stage of production
X-inefficiency
When firms produce at a cost above the AC curve
