Theme 3 Key Terms Flashcards
Allocative efficiency
- when resources are allocated to produce goods and services which consumers want and value the most highly, and social welfare is maximised. 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
avg fixed cost (AFC)
total fixed cost / output
avg variable cost (AVC)
total variable cost / output
Average Revenue (AR)
- the price each unit is sold for
- demand curve
- TR / quantity sold
barometric firm price leadership
- where a firm develops a reputation for being good at predicting the next move in an industry and other firms decide to follow their lead
bilateral monopoly
where there is only one buyer and one seller in the market
cartels
a formal collusive agreement where the firms agree to mutually set prices (overt)
collusion
occurs when firms agree to work together, for example by setting a price or fixing the quantity they produce
competition policy
govt action/policies to increase competition in markets
competitive tendering
when the government contracts out of the provision of a good or service and invited firms to bid for the contract
conglomerate integration
the merger of firms with no common connection
e.g. Comcast (cable provider) and General Electric (industrial) bought NBC (content producer).
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
cross subsidisation
when a large firm uses profits from one sector to subsidise a price war in another sector, allowing them to sell at a competitive price (or maybe a loss) to force other firms out the market
decreasing returns to scale
an increase in inputs by a certain proportion will lead to output increasing by a smaller proportion
degree of contestability
- measured by the extent to which the gains from market entry for a firm exceed the costs of entering the market
demergers
a single business is broken into two or more businesses to operate on their own, to be sold or dissolved
- Pepsi emerged from Pizza Hut, KFC and Taco Bell to focus on comp with Coca-Cola (1997)
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
- decreasing returns to scale (output increases by a smaller % than inputs)
divorce of ownership from control
- firms are owned by shareholders, who have little say in the day-to-day running of the business and are controlled by managers
- this leads to the principle-agent problem
dynamic efficiency
efficiency of resource allocation and use over time. related to the ability of an economy/firm to adapt, innovate, and improve resource allocation continually with changing market conditions, consumer preferences, and tech, leading to long-term economic growth and welfare enhancement
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
increasing returns to scale:
- increase in inputs (%) will lead to a greater % increase in output
external economies of scale
an advantage that 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
for-profit business
a business whose main aim is to make money + maximise financial benefits for shareholders
- almost all priv sector businesses
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 area to another
horizontal integration
the merger of firms in the same industry at the same stage of production
- disney bought Fox’s assets for over $70bn so can now use their stuff eg. Avatar.
incumbent firm
- businesses already established in each market or industry
- may have adv of loyal customer base & achieved internal economies of scale, avg costs lower than other firms in market
increasing returns to scale/economies of scale
an increase in inputs by a certain proportion will lead to an increase in output by a larger proportioni
interdependent
the actions of one firm directly affects another firm
internal economies of scale
an advantage that a firm can 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 (the limit price), low enough to discourage other firms entering, but high enough they make normal profit
- increased barrier to entry, mainly in contestable markets
loss
when revenue does not cover costs
LRAC curve
- boundary representing minimum level of average costs attainable at any given level of output
- points below LRAC are unattainable, above LRAC is inefficient
marginal cost
the additional cost of producing one extra unit of good
change in total cost/change in output
marginal revenue (MR)
the additional revenue gained by selling one extra unit of good
- Change in total rev / change in output
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 that 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 % of market share held by the ‘n’ biggest firms
nash equilibrium
- where neither player in game theory is able to improve position, and has optimised their output based on the other players decision.
nationalisation
when a private sector comany or industry is brought under state control, to be owned and managed by the govt
natural monopoly
- where economies of scale are so large that not even a single producer can 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, e.g. customer service or quality
- they aim to increase the loyalty to the brand which makes demand more inelastic
normal profit
- the minimal 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 to maximize social welfare and help individuals and groups
- any profit they do make is used to support their aim
occupational mobility of labor
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 interdependantly
organic growth
where firms grow by increasing their output (↑ investment or labour)
- e.g. LEGO
overt collusion
collusion is 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 low price that other firms make losses and are driven out of the market
price leadership
where one firm has advantages (size or lower costs) so = dominant firm, sets prices and other firms tend to follow this firm as they are fearful of engaging in a price war (tacit)
price wars
where the firms continuously drop prices down to the point where they are frequently making losses and firms are forced to leave, giving them more market share
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 individual
privatisation
the sale of government equity in nationalised industries or other firms to private investors
productive efficiency
- when the minimum resources are used to give the maximum possible output at the
lowest possible cost, produced at lowest AC
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 or controlled by local or central government
regulatory capture
- when regulators become more empathetic and can ‘see things from the firms perspective’
- removed impartiality and weakens their ability to regulate
revenue maximization
- when firms produce at a point that 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
efficiency of resource allocation and the maximization of overall societal welfare at a given point in time, without considering changes over time. concerned with the immediate allocation of resources to achieve the best possible outcome at a specific moment
sunk cost
costs that cannot be recovered once they have been spent/if the business leaves the industry
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 descrimination
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
- TVC + TFC
total fixed cost (TFC)
costs that dont change with output and remain constant
e.g. rent, machinery
total variable cost (TVC)
- costs that change directly with output
e.g. materials
total revenue
- total amount of money coming into business from the sale of goods + services
- price x quantity sold
trade unions
an organisation with members who are usually workers or employees, which protect the rights an pay fo workers through a process of collective bargaining
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
- e.g. Tesco’s £3.7bn takeover of Booker, 2018
x inefficiency
when a lack of effective/real competition in a market or industry means that average costs are higher than they would be with competition (when firms produce at a cost above the AC curve)
e.g businesses happy with satisficing profits, allowing a degree of organisational slack, and rising AC of labour as wages rise, or overemployment occurs.
