Edexcel A-level Economics Theme 3

Backwards vertical integration

a joining together into one firm of two or more firms where the purchaser merges with/takes over one or more of its suppliers

Conglomerate integration

a joining together into one firm of two or more firms producing unrelated products

Demerger

when a firm splits into two or more independent businesses

Divorce of ownership from control

when managers and directors of a business are different from the owners of a business (the shareholders)

Forward vertical integration

a joining together into one firm of two or more firms where the supplier merges with/takes over one or more of its buyers

Horizontal integration

a joining together of two firms in the same industry at the same stage of production

Niche market

a small segment of a larger market

Merger/integration

the joining together of two or more firms under common ownership

Not-for-profit organisations

organisations that do not aim to make a profit; rather, they use any profit or surplus they generate to support their aims (eg. a charity)

Organic or internal growth

a firm increasing its size through investment in capital equipment/an increased labour force

Private sector organisations

organisations owned by individuals or companies rather than the state

Public sector organisations

organisations owned and controlled by the state

Synergy

when two or more activities/firms put together can lead to greater outcomes than the sum of the individual parts

Vertical integration

a joining together into one firm of two or more firms in the same industry at different stages of production

Average revenue

the average receipts per unit sold // TR÷Q

Marginal revenue

the addition to total revenue of an extra unit sold // ΔTR÷ΔQ

Total revenue

the total amount of money received from the sale of any given quantity of output // AR*Q

Average product

the quantity of output per unit of factor input // total product÷level of output

Law of diminishing marginal returns

if increasing quantities of a variable input are combined with a fixed input, eventually the marginal product and then the average product of that variable input will decline.

Long run

the period of time when all factors of production can vary, as does the number of firms in the market, but the level of technology remains constant

Marginal product

the addition to output produced by an extra unit of input // Δtotal output÷Δlevel of inputs

Returns to scale

the change in percentage output resulting from a percentage change in all the factors of production

Short run

the period of time in which at least one factor of production is fixed, as is the number of firms in the market

Total product

the quantity of output measured in physical units produced by a given number of inputs over a period of time

Very long run

the period of time in which all factors are variable, as is the number of firms in the market, and the state of technology is variable

Average cost

the average cost of production per unit // AVC+AFC

Average fixed cost

TFC÷Q

Average variable cost

TVC÷Q

Diseconomies of scale

a rise in the long run average costs of a firm as production increases

Economic cost

the opportunity cost of an input into the production process

Economies of scale

a fall in long run average costs of production as output rises

External economies of scale

where the average cost of a firms production falls due to growth in the size of the industry in which the firm operates

Fixed costs

costs which do not vary as the level of production changes

Imputed cost

an economic cost which a firm does not pay for with money to another firm, but is the opportunity cost of the factors of production which the firm itself owns

Internal economies of scale

economies of scale which arise due to growth in the scale of production within a firm

Marginal cost

the cost of producing an extra unit of output

Minimum efficient scale (MES)

the lowest level of output at which long run average costs are minimised

Optimal level of production

the range of output over which long run average costs are lowest

Semi-variable costs

costs that contain within it a fixed and variable cost element

Total cost

the cost of producing at any given level of output // TFC+TVC

Total fixed cost

the value of the cost of production that does not vary with output

Total variable cost

the overall cost of factors of production that vary directly with output

Variable costs

costs which vary directly in proportion with output

Supernormal profit

profit above normal profit

Normal profit

the amount of profit required to keep all factors of production employed in their current use in the long run (AKA Break-Even point)

Subnormal profit

profit below normal profit

Barriers to entry

factors which make it difficult/impossible for firms to enter an industry and compete with existing producers

Barriers to exit

factors which make it difficult/impossible for firms to leave a market and cease production

Brand

a name, design, symbol or other feature that distinguishes a product from another and makes it non-homogenous

Concentration ratio

the market share of the largest firms in the industry

Homogenous goods

identical goods made by different firms

Independence

where the actions of one firm has no significant impact on any other firms in the market

Interdependence

where the actions of one firm have an impact on other firms in the market

Limit pricing

when a firm sets a low enough pricing to deter new entrants into a market

Market concentration

the degree to which the output of a market is dominated by the largest firms

Market share

the proportion of sales in a market taken by a firm/group of firms

Market structure

the characteristics of a market that determine the behaviour of firms in the market

Natural monopoly

where economies of scale are so large relative to market demand that the dominant producer will always enjoy lower costs of production than any competitors

Non-homogenous goods

goods that are similar but not identical, for example through use of branding

Perfect information

when all buyers are fully informed of all prices and quantities for sale, whilst producers have equal information to production techniques

Product differentiation

aspects of a good/service that distinguish a product from its competition, for example through packaging or marketing

Sunk costs

costs of production that are not recoverable if a firm leaves an industry

Uncertainty

a when one firm does not know how other firms will react if it changes strategy

Perfect competition

market structure where there are many buyers and sellers, freedom of entry and exit, perfect knowledge and where all firms produce a homogenous product

Price taker

a firm with no control over market price and must accept the market price if it wants to sell its product

Monopolistic competition

a market structure where a large number of small firms produce non-homogenous products and where there are no barriers to entry

Monopolist

a firm that controls all the output in a market

Monopoly

a market structure where ine firm supplies all output in the market without facing competition due to high barriers to entry

Price discrimination

charging different prices for the same good/service in different markets

Monopoly power

when firms are able to control the price they charge for their product

Monopsony

when there is only one buyer in a market

Contestable market

a market with freedom of entry and where the costs of exit are low

Hit and run competition

when firms can enter a market at low cost attracted by high profits and then leave at low cost when profits fall

Consumer sovereignty

exists when the economic system allocates resources totally according to consumer preference

Cost-plus pricing

where firms fix a price for their products by adding a fixed percentage profit margin on top of the long run average cost of production

Profit maximisation

when profit is at its highest // MR=MC

Profit satisficing

making sufficient profit to satisfy the demands of owners eg. shareholders

Revenue maximisation

when revenue is at its highest // MR=0

Sales maximisation

when the volume of sales is at its highest // AR=AC

Allocative efficiency

where the goods produced satisfy consumer preferences and maximise their welfare

Dynamic efficiency

where investment reduces the long run average cost curve

Productive efficiency

production at the lowest average cost

X-inefficiency

inefficiency arising from a lack of competition

Creative destruction

where firms produce/create new products that replace existing products on the market

Multi-plant monopolist

the sole producer in an industry has multiple places of production which can be sold off to create competition

Competitive tendering

introducing competition among private sector firms which put in bids for work contracted out by public sector firms

Contracting out

getting private sector firms to produce goods and services then provided by the state

Deregulation

the process of removing government controls from markets

Regulatory capture

when firms can influence to their advantage the market regulatory body

Nationalisation

the transfer of assets from the private to public sector

Privatisation

the transfer of assets from the public to private sector

Elasticity of demand for labour

responsiveness of the quantity demanded of labour to changes in the price of labour // Δ%Q or labour÷Δ%Wage rate

Marginal physical product

the physical addition to output of an extra unit of a variable factor of production

Marginal revenue product

the value of the physical addition to outputof an extra unit of a variable factor of production

Total physical product

the total output of a given quantity of factors of production

Unit cost of labour

the cost of employing labour per unit of output

Activity rate

the proportion of any given population actually in the workforce

Economically active

the number of workers in the workforce either in a job or unemployed

Net migration

immigration-emigration

Population of working age

size of the population between school leaving age and the state retirement age