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Economies of Scale
A fall in Long Run Average Costs due to an increase in a firm's output/scale/size
Fixed cost
A cost that doesn't change with output
Variable Cost
A cost that varies with output
Profit
The difference between total revenue and total costs
Short Run
When one or more factors of production are fixed
Long Run
When all factors of production can vary
Diminishing returns
When marginal output/product falls as output increases, due to a limiting/fixed factor.
Market failure
When the market mechanism causes a misallocation of resources
Government failure
When a government intervention causes a greater misallocation in a market/the economy.
Fundamental Economic Problem
Infinite wants, limited resources
Scarcity
Produced by the fundamental problem of economics
Capital
Used but not used up in the act of production
Interest
Factor payment for capital
Rent
Factor payment for Land
Wages
Factor payment for Labour
Externality
Cost or benefit due to the actions of a third party
Public good
Non-rival and Non-excludable good
Price-Elasticity of Demand
% Change in Demand/% change in Price
Rivalry
Consumption of the good prevents the benefit accruing to another party
Excludable
It's possible to restrict access to the good or service
Social Benefit
Private benefit + External benefit
External Cost
Social cost - private cost
Merit good
Value judgement on a good that should be provided by the government
Specialisation
Increased productivity from restricted scope in production
Division of Labour
Separating the production process into separate jobs to be carried out by different groups or individuals
Joint Supply
Production of one good creates supply in another market as well
Competing supply
Two goods require the same scarce good/service to be made.
Luxury good
Inelastic PeD, Elastic Yed
Necessity good
Inelastic PeD, Inelasic YeD
Veblen Good
Positive PeD, Elastic YeD
Excess Demand
When quantity demanded is greater than quantity supplied
Excess Supply
When quantity supplied is greater than quantity demanded
Inferior Good
Negative YeD
Composite Demand
When a good's demand comes from a number of sources
Derived demand
When a good's demand is greatly dependent on another market's supply/demand
Opportunity Cost
The next best alternative sacrificed
PPF
Graph showing the maximum production of two goods
Allocative Efficiency
P = MC, when resources are used to best match people's tastes and preferences
Productive efficiency
Can't make more of one good without making less of another
Positive statement
A statement that can be tested
Normative statement
A statement that expresses a value judgement
Equilibrium
When price and quantity don't change
Inelastic Price Elasticity of Demand
PeD < 1
Elastic Price Elasticity of Demand
PeD > 1
Complementary Goods
XeD < 0
Substitute Goods
XeD > 0
Oligopoly
Several large firms exist in the market
Marginal product of labour
Revenue gained from hiring another worker
Marginal cost
Cost of producing one more product
Marginal Revenue
Total Revenue gained from selling one more product
Marginal Utility
Utility gained from consuming one more good/service
Price ceiling
Maximum price
Price floor
Minimum price
Non-rival
One person's consumption doesn't reduce the amount available for others
Non-excludable
It's not possible to prevent someone from consuming the good/service, causes a free-rider problem
Perfect competition
Large number of buyers and sellers; perfect information; can buy and sell as much as desired at the market price; price takers; homogenous good; no barriers to entry/exit
Monopoly
A Single firm in the market. Legally, a company with over 25% market share
Barrier to Entry
Something that makes it difficult for new firms to enter the market
Barrier to Exit
Something that makes it difficult for firms to leave the market
Price Taker
Firms that must accept the market price as dictated by supply and demand
Price maker
Where a firm has the power to set the market price
Monopoly power
The degree to which a firm can act as a price maker
Profit Maximisation
MC = MR, where a firm makes the greatest amount of profit possible.
Competitive market
Where firms compete with each other in the market
Market conduct
How firms make decisions in the market, especially on price and output.
Concentration Ratio
The market share of the largest firms.
Sunk Costs
A cost that cannot be recovered when leaving the market
Product differentiation
The process of making products different from each other in the same market, in order to make them less substitutable
Natural monopoly
Where there is only space for a single firm in the market to exploit economies of scale.
Artificial Barriers to Entry
Barriers to entry that are the result of deliberate actions of existing firms to prevent new entrants
Natural Barriers to entry
Existing firms are more productively efficient than new entrants, i.e. can produce at a lower long-run average cost. Often caused by indivisibilities and Economies of scale.
Patent
A government-protected right to be the sole producer of the good.
Invention
The creation of new products or processes
Innovation
Converting inventions into marketable products or services
Limit prices
Prices set low enough to prevent new firms entering the market
Predatory prices
Prices set below average cost (or very low) with the aim of forcing out rival firms in the market
Normal Profit
Zero economic profit - profit earned is equal to the opportunity cost
Abnormal Profit
Profit earned above normal profit.
Homogenous good
The goods are identical
Perfect information
Buyers and Sellers have all the information relevant to the market
Consumer Sovereignty
Consumers collectively determine the combination of price and quantity in the market
Producer Sovereignty
Producers determine the combination of price and quantity in the market
Divorce of ownership from control
The owners and managers of the business are different people and sometimes different objectives
Satisficing
Achieving a satisfactory option rather than the best one
Static Efficiency
Efficiency at a particular point in time
Dynamic efficiency
Efficiency in the Long Run, through the development of new products or improvements to production processes
Monopolistic competition
A market structure with a large number of firms and barriers to entry in the short run, but not in the long run.
Collusion
When firms cooperate.
Cartel
A collusive agreement between firms, usually to fix prices, but it can also include restricting output and preventing new entrants
Imperfect competition
Market structures between perfect competition and pure monopoly
Incentive function of prices
Prices can influence people and firms to change their behaviour
Rationing function of prices
Rising prices rations demand for a scarce good
Allocative function of prices
Changing relative prices allocates resources away from markets with excess supply and towards markets with excess demand
Imperfect information
Where people make the wrong decision due to lacking relevant information, typically about long-run benefits or costs.
Missing market
Where there is no market due to complete market failure
Pure monopoly
When there is only one firm in the market
Resource misallocation
When resources are allocated in a way that doesn't maximize economic welfare
Signaling function of price
Prices provide information to buyers and sellers
Technical Economy of Scale
A cost saving generated through changes to the productive process as the scale/size/output of the firm increases
Managerial Economy of Scale
A cost saving generated through specialization and division of labour within management, for example by hiring specialist managers.
