Theme 3 CC2 Definitions

Shutdown point

Where AR=AVC

Breakeven point

Where AR=AC

Allocative efficiency

MC=AR

Productive efficiency

MC=AC (minimum point on AC curve)

Dynamic efficiency

Supernormal profit in the long run

X-efficiency

Production lies on the AC curve

Price discrimination

Charging different prices to different consumers for an identical good/service with no differences in costs of production

First degree price discrimination

When consumers are charged the exact price that they are willing and able to pay

Second Degree Price Discrimination

Different prices charged depending on amount of capacity already sold

Third Degree Price Discrimination

Different groups of consumers being charged different prices

Natural monopoly

When a single firm can serve the entire market at a lower LRAC than multiple, smaller firms (e.g. water/gas/electricity distribution, rail track providers)

Cross subsidisation

The ability of a firm to subsidise the loss in one market with the supernormal profits made in another

Consumer surplus

The difference between the price a consumer is willing and able to pay and the price they actually pay (area below demand curve and above price)

Market seepage

When a low price, high PED good/service is resold in a high price, low PED market