definitions theme 3

Question 1

what is allocative efficiency

Answer 1

resources are allocated to the best interests of society, with max social welfare and utility
P=MC

Question 2

what is AC

Answer 2

cost of production per unit:

TC
/
Quantity produced

Question 3

what is AR

Answer 3

the price each unit is sold for

TR
/
Quantity sold

Question 4

what is a bilateral monopoly

Answer 4

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

Question 5

what is a cartel

Answer 5

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

Question 6

what is collusion

Answer 6

occurs when firms agree to work together, eg by setting a price or fixing their quantity produced

Question 7

what is competitive tendering

Answer 7

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

Question 8

what is a conglomerate integration

Answer 8

the merger of firms with no common connection

Question 9

what’re constant returns to scale

Answer 9

output increases by the same proportion that the inputs increase by

Question 10

what is a contestable market

Answer 10

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

Question 11

what’re decreasing returns to scale

Answer 11

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

Question 12

what is derived demand

Answer 12

the demand for 1 good is linked to the demand for a related good

Question 13

what is diminishing marginal productivity

Answer 13

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

Question 14

what is diseconomies of scale

Answer 14

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

Question 15

what is the principal agent problem also known as

Answer 15

divorce of ownership from control, whereby firms are owned by shareholders who have little say in the day-to-day running of the business

Question 16

what is dynamic efficiency

Answer 16

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

Question 17

what’re external EoS

Answer 17

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

Question 18

what’re fixed costs

Answer 18

costs which do not vary with output

Question 19

what is game theory

Answer 19

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

Question 20

what is interdependence

Answer 20

the actions of 1 firm directly affects another firm

Question 21

what is internal economies of scale

Answer 21

an advantage a firm has because of growth in the firm, independent to other firms or the general industry

Question 22

what is limit pricing

Answer 22

firms setting low prices in order to prevent new entrants

Question 23

what is is marginal cost/revenue

Answer 23

the additional cost/revenue from producing/selling an extra unit of good

Question 24

what is the minimum efficient scale

Answer 24

the lowest level of output necessary to fully exploit Eos

Question 25

what is monopolistic competition

Answer 25

where there are a large number of buyers and sellers who are relatively small and act independently, selling differentiated goods

Question 26

what is a monopoly/monopsony

Answer 26

a single seller/buyer in the market

Question 27

what is non-price competition

Answer 27

competition by firms on factors other than price, eg customer service or quality; aiming to increase the loyalty to the brand which makes demand more inelastic

Question 28

what is normal profit

Answer 28

the minimum reward required to keep firms supplying their enterprise, TC=TR

Question 29

what is occupational mobility of labour

Answer 29

the ease/speed at which labour can move from 1 job type to another

Question 30

what is overt collusion

Answer 30

collusion as a result of a formal agreement, eg a cartel

Question 31

what are the characteristics of perfect competition

Answer 31

a market with many buyers and sellers, homogenous goods, perfect information and no entry/exit barriers

Question 32

what are the characteristics of a perfectly contestable matket

Answer 32

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

Question 33

what is predatory pricing

Answer 33

when a large firm sets a low price that other new entrant firms make losses and are driven out of the market

Question 34

what is the difference between limit and predatory pricing

Answer 34

limit pricing is used by the existing supplier to restrict new entrants currently out of the market; predatory is what a supplier used to out the other existing market suppliers

Question 35

what is price leadership

Answer 35

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

Question 36

what is the private sector

Answer 36

the part of the economy owned/run by individuals/groups of individuals

Question 37

what is productive efficiency

Answer 37

MC=AC, when resources are used for the max output at the lowest cost

Question 38

what is profit satisficing

Answer 38

when a firm earns just enough profit to keep its shareholders happy

Question 39

what’re consumer characteristics

Answer 39

rational consumption utility satisficers some inertia?

Question 40

what is the public sector

Answer 40

the part of the economy owned/controlled by local or central government

Question 41

what is regulatory capture

Answer 41

when regulators become too empathetic to firms they’re regulating, removing their impartiality and weakens their ability to regulate

Question 42

what is revenue maximisation

Answer 42

when firms produce at the point giving the most revenue MR=0

Question 43

what is sales maximisation

Answer 43

when firms produce where they sell as many goods/services as possible without making a loss AR=AC

Question 44

what is static efficiency

Answer 44

the level of efficiency at one point in time

Question 45

what’re sunk costs

Answer 45

costs which cannot be recovered once spent

Question 46

what is tacit collusion

Answer 46

collusion where there is no formal agreement, eg price leadership

Question 47

what is the TR and TC formulae

Answer 47

TR= P x QS TC = TVC + TFC

Question 48

what is vertical integration

Answer 48

when a firm merges/takes over a firm in the same industry but at a different stage of production

Question 49

what is x-inefficiency

Answer 49

when firms produce at a cost above the AC curve

Question 50

what’re diminishing returns of labour

Answer 50

as businesses increase the amount of one input factor (eg labour) while keeping other inputs constant, the MRP of that input will eventually decrease

Question 51

what is the difference between deregulation and privatisation

Answer 51

privatisation: transfer of ownership and control of government owned industries to the private sector deregulation: the removal/relaxation of government regulations on industries and markets.