IB Microeconomics SL - basic vocab

Firm

An entity such as a business that uses factors of production in order to produce and sell goods and services and earn profits. It is an important decision maker in a market economy.

Firms

Productive units that transform inputs (factors of production) into output (goods and services), usually aiming at earning profits.

Revenue

Payments received by firms when they sell their output.

Total revenue

The amount of revenue received by a firm from the sale of a particular quantity of output (equal to price times quantity sold).

Average revenue

Revenue earned per unit sold; average revenue is thus equal to the price of the good.

Marginal revenue

The extra or additional revenue that arises for a firm when it sells one more unit of output.

Cost

The expenditure incurred by a firm in the process of producing goods and services.

Total costs

All the costs of a firm incurred for the use of resources to produce something.

Average cost

Total costs per unit of output produced.

Marginal cost

The extra or additional cost of producing one more unit of output.

Short run in microeconomics

The period of time when at least one factor of production is fixed.

Long run in microeconomics

The period of time when all factors of production are variable.

Law of diminishing marginal returns

A short-run law of production stating that as more and more units of the variable factor (usually labour) are added to a fixed factor (usually capital) there is a point beyond which total product continues to rise but at a diminishing rate or, equivalently, marginal product starts to decrease.

Economies of scale

Falling average costs that a firm experiences when it increases its scale of operations.

Diseconomies of scale

Rising average costs that a firm experiences when it increases its scale of operations beyond the optimal level.

Normal profit

The minimum return that must be received by a firm in order to stay in business. A firm earns normal profit when total revenue is equal to total cost, or when average revenue or price is equal to average cost.

Abnormal profit

This arises when average revenue is greater than average cost (greater than the minimum return required by a firm to remain in a line of business).

Loss (economic)

Occurs when total costs of a firm are greater than total revenues. It is equal to total cost minus total revenue.

Profit maximization

A possible objective of firms that involves producing the level of output where profits are greatest: where total revenue minus total cost is greatest or where marginal revenue equals marginal cost.

Revenue maximization

An objective of a firm to produce the level of output at which total revenue is maximized.

Corporate social responsibility

A corporate goal adopted by many firms that aims to create and maintain an ethical and environmentally responsible image.

Market structure

The characteristics of a market that determine the behaviour of firms within it, including the number of firms, degree of product differentiation, and ease of entry and exit.

Perfect competition

A market structure where there is a very large number of small firms, producing identical products, with no barriers to entry or exit, and perfect information. All the firms are thus price takers.

Price taker

A firm that is unable to influence the price at which it sells its product, being forced to accept the price determined in the market. It includes firms in perfect competition.

Monopolistic competition

A market structure where there are many sellers, producing differentiated products, with no barriers to entry.

Product differentiation

The process by which firms try to make their products different from the products of other firms in an effort to increase their sales. Differences involve product quality, appearance, services offered and many others.

Oligopoly

A market structure where there are a few large firms that dominate the market, with high barriers to entry.

Non-collusive oligopoly

Firms in an oligopoly that do not resort to agreements to fix prices or output. Competition tends to be non-price, and prices tend to be stable.

Collusive oligopoly

A market where firms agree to fix price and/or engage in other anticompetitive behaviour.

Price competition

Competition between firms that is based on price; for example, a firm that wants to increase its sales at the expense of others will lower its price.

Non-price competition

Competition between firms that is based on factors other than price, usually taking the form of product differentiation.

Price war

Occurs when firms successively cut their prices in an effort to match the price cuts of other firms, resulting in lower profits, possibly losses.

Monopoly

A market structure where there is only one firm in the industry, so the firm is the industry. There are high barriers to entry.

Barriers to entry

Anything that deters entry of new firms into a market, for example, licences or patents.

Natural monopoly

A monopoly that can produce enough output to cover the entire needs of a market while still experiencing economies of scale. Its average costs will therefore be lower than those of two or more firms in the market.

Market power

The ability of a firm (or group of firms) to raise and maintain price above the level that would prevail under perfect competition (P > MC).

Concentration ratios

The proportion of industry sales accounted for by the largest firms; the greater this proportion, the greater the degree of market power of the firms in the industry.

Anti-monopoly regulation

Laws and regulations that are intended to restrict anti-competitive behaviour of firms that are abusing their market power.

Price maker

A firm that is able to influence the price at which it sells its product. Includes firms in all market structures except perfect competition.

Efficiency

In general, involves making the best use of scarce resources. May refer to producing at the lowest possible cost (productive efficiency) or to allocative efficiency where marginal social costs are equal to marginal social benefits.

Productive efficiency

A situation where output is produced at the lowest possible cost.

Allocative efficiency

Achieved when just the right amount of goods and services are produced from society’s point of view so that scarce resources are allocated in the best possible way (MSB = MSC).

Dynamic efficiency

When firms are able to achieve both allocative and productive efficiency over time, often through innovation and investment.