Theme 3 Definitions

Flashcards of keywords and definitions related to business behaviour and the labour market.

What is Allocative efficiency?

When resources are allocated to the best interests of society, when there is maximum social welfare and maximum utility; P=MC

What is Asymmetric information?

Where one party has more information than the other, leading to market failure and causing problems for regulators

What is Average cost/average total cost (AC/ATC)?

The cost of production per unit - total costs/quantity produced

What is Average revenue (AR)?

The price each unit is sold for - TR/quantity sold

What is Bilateral monopoly?

Where there is only one buyer and one seller in the market

What are Cartels?

A formal collusive agreement where firms enter into an agreement to mutually set prices

What is Collusion?

Occurs when firms agree to work together, for example by setting a price or fixing the quantity they produce

What is Competition policy?

Government action to increase competition in markets

What is Competitive tendering?

When the government contracts out the provision of a good or service and invites firms to bid for the contract

What is Conglomerate integration?

The merger of firms with no common connection

What is Constant returns to scale?

Output increases by the same proportion that the inputs increase by

What is Contestable market?

When there is the threat of new entrants into the market, forcing firms to be efficient

What is Decreasing returns to scale?

An increase in inputs by a certain proportion will lead to output increasing by a smaller proportion

What are Demergers?

A single business is broken into two or more businesses to operate on their own, to be sold or to be dissolved

What is Deregulation?

The removal of legal barriers to allow private enterprises to compete in a previously protected market

What is Derived demand?

The demand for one good is linked to the demand for a related good

What is Diminishing marginal productivity?

If a variable factor is increased when another factor is fixed, there will come a point when each extra unit of the variable factor will produce less extra output than the previous unit; after a certain point, marginal output falls

What are Diseconomies of scale?

The disadvantages that arise in large businesses that reduce efficiency and cause average costs to rise

What is Divorce of ownership from control?

Firms are owned by shareholders, who have little say in the day to day running of the business, and controlled by managers; this leads to the principal-agent problem

What is Dynamic efficiency?

Efficiency in the long run; concerned with new technology and increases in productivity which causes efficiency to increase over a period of time

What are Economies of scale?

The advantages of large scale production that enable a large business to produce at a lower average cost than a smaller business

What are External economies of scale?

An advantage which arises from the growth of the industry within which the firm operates, independent of the firm itself

What is Fixed cost?

Costs which do not vary with output

What is For-profit business?

A business whose main aim is to make money

What is Game theory?

Used to predict the outcome of a decision made by one firm, when it has incomplete information about the other firm

What is Geographical mobility of labour?

The ease and speed at which labour can move from one area to another

What is Horizontal integration?

The merger of firms in the same industry at the same stage of production

What is Increasing returns to scale?

An increase in inputs by a certain proportion will lead to an increase in output by a larger proportion

What is Interdependent?

The actions of one firm directly affects another firm

What are Internal economies of scale?

An advantage that a firm is able to enjoy because of growth in the firm, independent of anything happening to other firms or the industry in general

What is Limit pricing?

When firms set prices low in order to prevent new entrants; used in contestable markets

What is Loss?

When revenue does not cover costs

What is Marginal cost?

The additional cost of producing one extra unit of good

What is Marginal revenue?

The additional revenue gained by selling one extra unit of good

What is Maximum wage?

A ceiling wage which people cannot earn above

What is Minimum efficient scale?

The lowest level of output necessary to fully exploit economies of scale

What is Minimum wage?

A floor wage which people cannot earn below

What is Monopolistic competition?

Where there are a large number of buyers and sellers who are relatively small and act independently, selling non-homogeneous goods

What is Monopoly?

A single seller in the market

What is Monopsony?

A single buyer in the market

What is N-firm concentration ratio?

The percentage of market share held by the ‘n’ biggest firms

What is Nationalisation?

When a private sector company or industry is brought under state control, to be owned and managed by the government

What is Natural monopoly?

Where economies of scale are so large that not even a single producer is able to fully exploit them; it is more efficient for there to be a monopoly than many sellers

What is Non-collusive oligopoly?

When firms in an oligopoly compete against each other, rather than making agreements to reduce competition

What is Non-price competition?

When firms compete on factors other than price, for example customer service or quality; they aim to increase the loyalty to the brand which makes demand more inelastic

What is Normal profit?

The minimum reward required to keep entrepreneurs supplying their enterprise, the return sufficient to keep the factors of production committed to the business; TC=TR

What is Not-for-profit business?

Where firms are run in order to maximise social welfare and help individuals and groups; any profit they do make is used to support their aims

What is Occupational mobility of labour?

The ease and speed at which labour can move from one type of job to another

What is Oligopoly?

Where a few firms dominate the market and have the majority of market share, they act interdependently

What is Organic growth?

Where firms grow by increasing their output

What is Overt collusion?

Collusion where firms come to a formal agreement, for example a cartel

What is Perfect competition?

A market with many buyers and sellers selling homogenous goods with perfect information and freedom of entry and exit

What is Perfectly contestable market?

A market with no barriers to entry, where a new firm can easily enter and compete against incumbent firms completely equally

What is Predatory pricing?

When a large, established firm is threatened by new entrants so sets such a low price that other firms make losses and are driven out the market

What is Price leadership?

Where one firm sets prices and other firms tend to follow this firm as they are fearful of engaging in a price war

What are Price wars?

Where firms continuously drive prices down to the point where they are frequently making losses and firms are forced to leave

What is Principal-agent problem?

Where the agent makes decisions on behalf of the principal; the agent should maximise the benefits of the principal but have the temptation of maximising their own benefits

What is Private sector?

The part of the economy that is owned and run by individuals or groups of individuals

What is Privatisation?

The sale of government equity in nationalised industries or other firms to private investors

What is Productive efficiency?

When resources are used to give the maximum possible output at the lowest possible cost; MC=AC

What is Profit maximisation?

When firms produce at a point which derives the greatest profit; MC=MR

What is Profit satisficing?

When a firm earn just enough profit to keep its shareholders happy

What is Public sector?

The part of the economy that is owned or controlled by local or central government

What is Regulatory capture?

When regulators become more empathetic and are able to ‘see things from the firm’s perspective’, which removes impartiality and weakens their ability to regulate

What is Revenue maximisation?

When firms produce at a point which derives the greatest revenue; MR=0

What is Sales maximisation?

When firms produce at a point where they sell as many of their goods and services as possible without making a loss; AR=AC

What is Static efficiency?

The level of efficiency at one point in time

What is Sunk cost?

Costs that cannot be recovered once they have been spent

What is Supernormal profit?

The profit above normal profit, TR>TC

What is Tacit collusion?

Collusion where there is no formal agreement, such as price leadership

What is Third degree price discrimination?

When monopolists charge different prices to different groups for the same good or service

What is Total cost?

The cost to produce a given level of output: total variable costs + total fixed costs

What is Total revenue?

Revenue generated from the sale of a given level of output: price x quantity sold

What is Variable cost?

Costs which change with output

What is Vertical integration?

When a firm merges or takes over another firm in the same industry, but at a different stage of production

What is X-inefficiency?

When firms produce at a cost above the AC curve