Economics Theme 4

key terms

Allocative efficiency

achieved when resources are used to yield the maximum benefit to everyone

Asymmetric information

occurs when one party knows more about a product than another

Barriers to entry

occur when start-up costs make it difficult for new firms to enter a market

Contestable markets

characterised by easy entry

Demand side policies

affect the economy by influencing AD

Demerit goods

over-produced by the free market, above social optimum

Deregulation

reducing regulations that restrict business practises

Direct tax

taken at the source and goes directly to the govt e.g., income tax

External benefits/costs

to third parties who is neither the producer nor consumer

Government failure

govt intervention in the free market makes things worse

Indirect taxes

added onto prices and go to the govt through a seller e.g., VAT

Interventionist policies

designed to control market forces for political reasons

Marginal cost

additional cost from producing one extra unit of output

Marginal revenue

the additional revenue from selling one more unit of output

Market failure

when a market does not efficiently allocate resources to achieve the greatest possible consumer satisfation

Merit goods

can be provided by the private sector, but the quantity that the free market provides is lower than the social optimum

Non-excludable

impossible to prevent people who have not paid for a good from consuming it e.g., street lighting

Non-rivalrous

if one person consumes a good there is no less for anyone else

Perfect competition

a market where products are homogenous, only normal profit can be obtained

Privatisation

transfering production to the private sector

Productive efficiency

maximises the effective use of resources

Progressive tax

takes a greater percentage of income away from richer people

Public good

one that the free market will not provide at all, no incentive for a producer to supply it because they cannot make a profit

Regulations

legal and other rules that apply to firms, may come from govts, the EU or trade associations

Trade-offs

when two objectives cannot both be achieved, more of one means less of the other (PPF e.g., capital vs consumer goods)

legal monopoly

25% of the market share

natural monopoly

when the most efficient scale of production is a monopoly because more than one producer/supplier would involve a wasteful allocation of resources e.g., railways

oligopoly

when a concentration ratio shows a small number of firms in a market account for over 60% of it

pricing strategy

the approach with which a business decides on setting price for its products/services (influenced by objectives)

penetration pricing

when a firm sets a low price to help establish market share

price skimming

when a firm releases a new product it initially sets a high price to take advantage of inelastic demand (e.g., new mobile phones)

predatory pricing

selling price below costs to force competitors out of the market, is illegal

normal profit

amount of profit required for firms to stay in business

concentration ratio

measures the extent to which a market is dominated by a few firms

tacit agreement

the understanding between competing businesses, set similar prices and focus on non-price competition

marginal cost

the cost of producing one more unit of output

marginal revenue

the additional revenue that comes from selling one more unit of output

contribution

the revenue from each unit sold that goes towards fixed costs i.e., minus VC

productive efficiency

minimising production costs by using the least quantity of resources, MC=AC

allocative efficiency

using resources to meet consumer needs and respond to changes in demand, MC=AR

market failure

when there is an inefficient allocation of resources, some are being wasted (costs could be lower and more consumer wants could be met)

cartel

an agreement within a group of firms to reduce competition, illegal, fix price and quantity suppliede

explicit collusion

two or more firms making an agreement to follow a joint strategy

restrictive practices

any action a business takes to prevent competition

regulatory body

a public authority or gov agency responsible for controlling business activity and promoting competition e.g., CMA

merit goods

can be provided by the public and private sectors, the quantity provided by the free market is below the socially optimal level

public goods

one that the free market will not provide at all because it is impossible to make a profit or prevent free riders

demerit goods

over-produced by the free market above the socially optimal level, have negative externalities

occupational immobility

unemployed lack skills to fill job vacancies

legislation

laws passed by gov

regulation

rules around what firms can and cannot do, mostly imposed by gov, but some industries self-regulate

full capacity output

the maximum output that can be produced when all available resources (FofP) are fully employed i.e., the vertical part of the LRAS curve

k effect

change in real GDP/change in J or 1/(1-MPC)

base rate

interest rates at which the BofE lends to high street banks

quantitative easing

asset purchases i.e., BofE buys gov bonds to provide finance for increase G

forward markets

buying a certain quantity of goods/foreign currency at a price agreed today, can alleviate uncertainty

moral hazard

when a bank has no incentive to minimise risk because they will be bailed out by the gov or central bank to protect consumers