Economics Unit 3

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  1. Allocative efficiency
    Occurs when resources cannot be reallocated to produce a different combination of goods that will increase economic welfare; i.e. economic welfare is maximised and the sum of consumer and producer surplus is maximised (P=MC).
  2. Average cost
    The cost per unit – total costs divided by quantity of output.
  3. Average revenue
    The average selling price – total revenue divided by the number of units of output sold.
  4. Backward vertical integration
    Where a firm merges or takes over a business that is one stage further away from the consumer in the production process.
  5. Barriers to entry
    Anything that prevents new firms entering a market such as brand loyalty, economies of scale, technical know-how and patents.
  6. Cartel
    A group of firms that agree to act together as though they were a monopoly in order to raise profits.
  7. Competition Commission
    The government body responsible for investigating markets that may have experienced a diminution of competition. Also charged with the investigation of mergers that may result in reduced competition in a market.
  8. Competition policy
    Policies designed to restrict the acquisition and exercise of monopoly power by firms.
  9. Competitive tendering
    When several firms bid for a contract, providing the buyer with lower cost and higher quality choices.
  10. Concentration ratio
    The percentage of total market sales controlled by a specific number of the industry’s largest firms (3, 5 and 7 firm ratios commonly used).
  11. Conglomerate merger
    When firms producing unrelated products merge.
  12. Contestable markets
    A perfectly contestable market is one where the sunk costs of entry are zero and therefore the incumbent firms will only make normal profits.
  13. Corporate objectives
    The range of targets a firm may have: it is often assumed in economics that a firm aims to maximise profits.
  14. De-merger
    Where a firm is divided up into separate businesses.
  15. Diminishing marginal returns
    An economic law stating that if increasing quantities of a variable factor are applied to a given quantity of a fixed factor, the marginal product of the variable factor will eventually decrease.
  16. Diseconomies of scale
    A rise in long-run average costs as output increases.

    A situation where increasing the scale of production further leads to an increase in the long run average costs of production.
  17. Economic efficiency
    Occurs when output is produced at the lowest cost in terms of resources used (productive) and in the quantity that reflects the best possible use of those resources given the relative value consumers place on the output (allocative).
  18. Explicit collusion
    When firms agree to co-operate rather than compete in order to raise profits.
  19. Economies of scale
    A fall in long-run average costs as output increases.
  20. External economies of scale
    Cost savings that arise from sources outside the firm due to the growth of the industry as a whole.
  21. First-mover advantage
    The advantages that accrue to a firm by being the first to enter a market such as market power or supernormal profit.
  22. Fixed costs
    • Costs that do not vary with output and exist only in the short run.
    • (e.g. rent, insurance, etc).
  23. Forward vertical integration
    Where a firm merges or takes over a business that is one stage closer to the consumer in the production process
  24. Game theory
    Game theory is used to predict a firm’s decision when faced with a set of choices whose payoffs are influenced by the choices of other firms in the market.
  25. Homogeneous products
    A product is homogeneous when consumers perceive each unit to be identical.
  26. Horizontal integration
    The joining of two firms together which produce similar products at the same stage of production.
  27. Imperfect competition
    Where firms have some price setting market power and thus face a downward sloping demand curve; e.g. duopoly, oligopoly and monopolistic competition.
  28. Incumbent firms
    Firms that are established in a market and therefore do not face sunk costs.
  29. Indivisibility
    Where a firm would not use a resource to its full capacity and therefore will not achieve the lowest unit costs of production – expanding the scale of production allows firms to utilise more efficient, larger machines and therefore reduce average costs.
  30. Interdependence
    Where the outcome from a decision is dependent upon the decisions of other rival firms.
  31. Internal economies of scale
    A situation where increasing the scale of production leads to a decrease in the long run average costs of production.
  32. Limit pricing
    Where a firm sets its price below the average cost of potential entrants in order to discourage entry.
  33. Long run
    The period of time required for all input costs to be variable.
  34. Marginal cost
    The additional cost of producing one more unit of output.

    The addition to TC from producing one more unit of output.
  35. Marginal revenue
    he additional revenue from selling one more unit of output.
  36. Market share
    A firm’s percentage share of the total market, normally measured using sales.
  37. Merger
    When two formerly independent firms unite.
  38. Monopolistic competition
    A market structure in which there are many buyers and sellers, free entry and exit but heterogeneous products giving each individual firm some price setting power.
  39. Monopoly
    A pure monopoly is one where the market has only one supplier. In the UK, the legal definition of a monopoly is when a firm has 25% or more market share.
  40. Monopoly power
    Monopoly power exists when a single seller in a market has the ability to set prices.
  41. Monopsony
    A market with only one purchaser.
  42. Multinational
    firm that has operations in more than one country (MNC).
  43. New entrants
    New firms in a market normally attracted by the existence of supernormal profits.
  44. Non-price competition
    Competitive activity that doesn’t involve reducing prices such as brand promotion, product differentiation, innovation and customer service.
  45. Normal profit
    The level of profit that represents the opportunity cost of the resources used to achieve it. If normal profits are not attained, resources will leave the market to be used more productively in an alternative market.

    The minimum (accounting) profit which the entrepreneur needs to remain in long-term production (i.e. the opportunity cost of capital and enterprise). Occurs at the level of output where AR = AC.
  46. OFT
    The Office of Fair Trading oversees competition policy in the UK, often referring suspected reductions in competition to the Competition Commission for investigation. It can bring criminal charges on business leaders and fine firms who are found to breach competition law e.g. formation of a cartel.
  47. Oligopoly
    An oligopoly is a market where there are a few interdependent firms dominating the market.
  48. Patent
    The legal right to be the sole use
  49. Perfect competition
    A market structure in which there are many buyers and sellers, free entry and exit, perfect information and homogeneous products thus making all firms price takers.
  50. Predatory pricing
    Predatory pricing occurs when a firm incurs short-term losses with the intention of removing a rival and/or deterring other potential competitors. It is considered anti-competitive by the OFT.
  51. Price discrimination
    The sale of the same good or service to different consumer groups at different prices. Three conditions are necessary: effective separation of markets to prevent resale, different PEDs for the separated markets and a degree of monopoly power.
  52. Price elasticity of demand
    The responsiveness of quantity demanded to a change in price.
  53. Price leader
    A firm with sufficient market power to decide on a price change which its competitors will tend to follow.
  54. Price taker
    A firm that can alter its output without having any effect on the price of the product it sells.
  55. Prisoner’s dilemma
    A model used to help show how two interdependent firms may rationally produce where both firms are worse off if collusion does not take place.
  56. Privatisation
    The transferring of economic activity out of the public sector and into the private sector in order to improve the productive efficiency of provision, improve innovation and increase investment.
  57. Product differentiation
    The existence of close substitutes within a market as firms try and establish a degree of price setting power.
  58. Productive efficiency
    Where a firm produces at the lowest point on its average cost curve and thus minimises the use of resources per unit produced.

    Any level of output at which LRAC is minimised; occurs where LRAC = LRMC
  59. Profit maximisation
    Profit maximisation is achieved at the level of output where MR=MC. It is often assumed that this is the primary objective of firms.
  60. Public-private partnerships (PPPs)
    The use of private firms by the government to improve the provision of public services through higher and more efficient investment. Private Finance Initiatives (PFIs) uses private capital and private sector companies to finance and operate infrastructure that was previously publicly funded and managed.
  61. Revenue maximisation
    An alternative objective in order to increase market share – it is the level of output where MR=0.
  62. Sales maximisation
    An alternative objective in order to achieve the highest level of sales whilst only making normal profit – it is the level of output where P(AR)=AC.
  63. Satisficing
    A business that pursues other objectives once a satisfactory level of profit has been attained.
  64. Short run
    The period of time over which the inputs of some factors cannot be varied and thus the quantity of firms in a market is constant.
  65. Shutdown point
    The level of output where total revenue is equal to total variable costs – below this point a firm would choose zero output to minimise the loss made.
  66. Shutdown price
    The price that is equal to average variable cost, below which a firm would choose zero output to minimise the loss made.
  67. Sunk costs
    A sunk cost of entry is a cost that a firm must incur to enter a market and that cannot be recovered if the firm subsequently exits.

    A cost which is irrecoverable upon exiting the industry (e.g. advertising, R&D, etc).
  68. Supernormal profit
    A level of profit that is higher than the required level of profit to keep the firm in the market. The existence of such excess profits will attract the entry of firms in the long run.
  69. Tacit collusion
    When firms behave in each other’s mutual interest and restrict their competitive actions without any agreement in place.

    Where firms refrain from price competition, but without any communication or formal agreement.
  70. Takeover bid
    The offer made by the potential buyer for the shares of another firm in order to achieve control of the business.
  71. Total cost
    TC = TFC + TVC
  72. Variable costs
    Costs that vary directly with output in both the short and long-run.

    (e.g. raw materials, direct labour,etc).
  73. X-inefficiency
    The failure of a firm to minimise costs at a given level of output and thus produce above its own average cost curve.
  74. Vertical integration
    The merging of two firms operating at different stages of production.

    Backward / upstream vertical integration (taking over a firm in a preceding stage of production)

    Forward / downstream vertical integration (taking over a firm in the next stage of production)
Card Set:
Economics Unit 3
2013-03-30 01:14:20
microeconomics A2

A2 Econs
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