1
Q
Abnormal profit
A
Abnormal profit is any profit in excess of normal profit - also known as supernormal profit
2
Q
Anti competitive behaviour
A
Anti-competitive practices are business strategies designed deliberately to limit the degree of competition inside a market
3
Q
Asymmetric information
A
Information relating to a transaction in a market where there is imbalance in the information available to either the buyer or the seller. Asymmetric information can distort the working of the market mechanism and lead to market failure
4
Q
Barriers to entry
A
Barriers to entry are designed to block potential entrants from entering a market profitably
5
Q
Behavioural economics
A
A branch of economics which focuses on understanding the nature of human decision making and which explores how decisions are taken when economic agents do not have access to full and free information and when their behaviour is not automatically assumed to be rational
6
Q
Bilateral monopoly
A
A market in which a single seller faces a single buyer. The final determination of price and output is such a situation is uncertain - much depends on the relative bargaining strength between the two parties concerned
7
Q
Break even
A
The break even output is the volume of goods or services that have to be sold in order for the business to make neither a loss nor a profit. The break even price is when price = average total cost
8
Q
Break even output
A
The break-even output occurs when AR=ATC (at this output, normal profit only is made)
9
Q
Business ethics
A
Business ethics is concerned with the social responsibility of management towards the firm’s major stakeholders, the environment and society in general
10
Q
Collective bargaining
A
Unions might seek to exercise their collective bargaining power with employers to achieve a mark-up on wages compared to those on offer to non-union members
11
Q
Collusive oligopoly
A
When several large firms in an industry act to restrict price or output
12
Q
Compensating wage differentials
A
Wage differentials in part act as a compensation for people who have to work unsocial hours or who are exposed to different degrees of risk at work, both in the short term and long run
13
Q
Competition policy
A
Government policy which seeks to promote competition and efficiency in different markets and industries
14
Q
Complex monopoly
A
A complex monopoly exists if at least one quarter (25%) of the market is in the hands of one or a group of suppliers who, deliberately or not, act in a way designed to reduce competitive pressures within a market
15
Q
Concentration ratio
A
Measure the proportion of an industry’s output or employment accounted for by, say, the three, five or seven largest firms
16
Q
Constrained revenue maximisation
A
Shareholders of a business may introduce a constraint on the price and output decisions of managers – this is known as constrained sales revenue maximisation
17
Q
Consumer surplus
A
Consumer surplus is the difference between the total amount that consumers are willing and able to pay for a good or service (indicated by the demand curve) and the total amount that they actually pay (the market price
18
Q
Contestable market
A
Baumol defined contestable markets as existing where “an entrant has access to all production techniques available to the incumbents, is not prohibited from wooing the incumbent’s customers, and entry decisions can be reversed without cost.”
19
Q
Cost benefit analysis
A
Cost benefit analysis (COBA) is a technique for assessing the monetary social costs and benefits of a capital investment project over a given time period
20
Q
Cost reducing innovation
A
Cost reducing innovations have the effect of causing an outward shift in market supply and they also provide the scope for businesses to enjoy higher profit margins with a given level of demand
21
Q
Cross subsidy
A
A firm operates a cross subsidy when it uses profits from one line of business to finance losses in another line of business. There are many reasons for maintaining a cross subsidy, either to promote a product new to the market which is making losses, or as a form of predatory pricing designed to eliminate an existing competitor, the latter is illegal under UK and European competition law
22
Q
Deadweight loss
A
A loss of social welfare deriving from a policy or action that has no corresponding gain. Deadweight losses of welfare are often associated with the economic costs of monopoly power in a market or the effects of negative and positive externalities that remain ignored by the free market mechanism
23
Q
Dependency ratio
A
The ratio of dependent population (the young and the elderly) to the working age population
24
Q
Deregulation of markets
A
Also known as market liberalisation, de-regulation involves the opening up of markets to competition by reducing some of the statutory barriers to entry that exis
25
Derived demand
The demand for all factors of production (inputs), including labour, is a derived demand i.e. the demand for factors of production depends on the demand for the products they produce
26
Diminishing returns
The law of diminishing returns states that as we add more units of a variable input (i.e. labour or raw materials) to fixed amounts of land and capital, the change in total output will at first rise and then fall. Diminishing returns to labour occurs when marginal product starts to fall
27
Diseconomies of scale
A business may expand in the long run may expand beyond the optimal size in the long run and experience diseconomies of scale. This leads to rising LRAC.
28
Disposable income
Disposable income equals gross income net of direct tax payments and state welfare benefits.
29
Divorce between ownership and control
The owners of a company normally elect a board of directors to control the business’s resources for them. However, when the owner of a company sells shares, or takes out a loan to raise finance, they sacrifice some of their control
30
Dominant market position
A firm holds a dominant position if it can operate within the market without taking account of the reaction of its competitors or of intermediate or final consumers.
31
Duopoly
Any market that is dominated by two organisations
32
Duopsony
Two major buyers of a good or service in a market
33
Dynamic efficiency
Dynamic efficiency occurs over time. It focuses on changes in the consumer choice available in a market together with the quality/performance of goods and services that we buy
34
Economic efficiency
Economic efficiency is achieved when an output of goods and services is produced making the most efficient use of our scarce resources and when that output best meets the needs and wants and consumers and is priced at a price that fairly reflects the value of resources used up in production
35
Economies of scope
Economies of scope occur where it is cheaper to produce a range of products
36
Elasticity of labour demand
Elasticity of labour demand measures the responsiveness of demand for labour when there is a change in the ruling market wage rate
37
Elasticity of labour supply
The elasticity of labour supply to an occupation measures the extent to which labour supply responds to a change in the wage rate in a given time period
38
Emissions trading
Emission trading is another form of pollution control that uses the market mechanism to change relative prices and the incentives of producers and consumers.
39
Equal Pay Act
The Equal Pay Act introduced in 1970 sought to provide legal protection for female workers and encouraged employers to bring the pay for males and females into line.
40
Equilibrium wage
The equilibrium price of labour (market wage rate) in a given market is determined by the interaction of the supply and demand for labour
41
Excess capacity
The difference between the current output of a business and the total amount it could produce in the current time period. Often in a recession or slowdown, there is a rise in excess capacity (= to a fall in capacity utilisation) due to a fall in demand. The effect can be to increase the average fixed costs of production
42
Excess demand
When demand for a good or service exceeds the production capacity of a business in a given time period
43
Explicit collusion
The aim collusion between firms is to maximise joint profits and act as if the market was a pure monopoly
44
External benefits
Positive externalities lead to social benefits exceeding private benefits
45
External costs
Negative spillover effects of production or consumption for which no compensation is paid. Externalities occur where the actions of firms and individuals have an effect on people other than themselves. With negative externalities, the social cost of production exceeds the private cost
46
External economies of scale
External economies of scale exist when the long-term expansion of an industry leads to the development of ancillary services which benefit all or the majority of suppliers in the industry.
47
First mover advantage
The idea that a business that creates a new product and which is first into the market can develop a competitive advantage in that market perhaps through learning by doing, because it has the advantage of being there first - making it more difficult and costly for new firms to come in
48
Fixed costs
Fixed costs relate to the fixed factors of production. Fixed costs are business expenses that do not vary directly with the level of output i.e. they are treated as exogenous or independent of production
49
Free rider problem
If a public good is supplied, it will be available to them just as it would be to anyone else because pure public goods are non-excludable. This is the essence of the “free rider problem”: the incentive which consumers have to avoid contributing to financing public goods in proportion to their valuation of such good.
50
Game theory
A game occurs when there are two or more interacting decision-takers (players) and each decision or combination of decisions involves a particular outcome (pay-off.)
51
Gini coefficient
The gini coefficient is a measure of income or wealth inequality. It is the ratio between the area between a Lorenz curve and the 45 degree line and the area below the 45 degree line. If the Lorenz Curve was the 45 degree line - then the value of the Gini Coefficient would be zero, but as the level of inequality grows so does the Gini Coefficient. In the most extreme possible scenario the Gini Coefficient would be 1
52
Government failure
Even with good intentions governments seldom get their policy application correct. They can tax, control and regulate but the eventual outcome may be a deepening of the market failure or even worse a new failure may arise.
53
Horizontal integration
Horizontal integration occurs when two businesses in the same industry at the same stage of production become one
54
Imperfect competition
Covers market structures between perfect competition and pure monopoly, i.e. an industry with barriers to entry and differentiated products - examples include oligopoly and duopoly
55
Inequality
The extent to which income and wealth between the inhabitants of a country is dispersed
56
Innovation
The Oxford English Dictionary defines innovation as "making changes to something established". Invention, by contrast, is the act of "coming upon or finding: discovery"
57
Interdependence
Interdependence exists when the actions of one firm has an effect on its competitors in the market. Interdependence is a common feature of an oligopoly
58
Internal growth
Internal growth occurs when a business gets larger by increasing the scale of its own operations rather than relying on integration with other businesses
59
Kinked demand curve
The kinked demand curve model assumes that a business might face a dual demand curve for its product based on the likely reactions of other firms in the market to a change in its price or another variable
60
Labour demand
There is normally an inverse relationship between the demand for labour and the wage rate that a business needs to pay for each additional worker employed
61
Labour force
The labour force is defined as the number of people either in work or actively seeking paid employment and available to start work
62
Labour market
This is made up of firms willing to employ workers and labour seeking employment. The demand for labour by firms is downward sloping with respect to wage (price of labour), while the supply of labour by households is upward sloping with respect to wage. The labour market is in equilibrium where the demand for labour equals the supply of labour.
63
Labour market discrimination
Discrimination is a cause of labour market failure and a source of inequity in the distribution of income and wealth and it is usually subject to government intervention e.g. through regulation and legislation.
64
Law of unintended consequences
The law of unintended consequences is that actions of consumer and producers — and especially of government—always have effects that are unanticipated or "unintended." Particularly when economic agents do not always act in the way that the economics textbooks would predict
65
Limit pricing
When a firm sets price just low enough to discourage possible new entrants
66
Marginal cost
Marginal cost is the change in total costs from increasing output by one extra unit
67
Marginal revenue
Marginal Revenue (MR) = The change in revenue from selling one extra unit of output
68
Marginal revenue product
Marginal Revenue Product (MRPL) measures the change in total revenue for a firm from selling the output produced by additional workers employed
69
Market failure
Market failure occurs when freely-functioning markets, fail to deliver an efficient allocation of resources. The result is a loss of economic and social welfare
70
Market failure under monopoly
The standard case against monopoly is that the monopoly price is higher than both marginal and average costs leading to a loss of allocative efficiency and a failure of the market mechanism
71
Means tested benefits
The process of means-testing looks at the levels of income and wealth of an individual or household to assess if they are entitled to something
72
Merit good
A merit good is a product that the government believes consumers undervalue and under-consume because of imperfect information
73
Minimum efficient scale
The minimum efficient scale (MES) is the scale of production where the internal economies of scale have been fully exploited. It corresponds to the lowest point on the long run average cost curve
74
Minimum wage
The National Minimum Wage was introduced in the UK with effect from 1st April 1999. It is a legally guaranteed wage rate for workers aged 18 years or older
75
Monopsony
As a firm grows in size it can purchase its factor inputs in bulk at negotiated discounted prices. This is particularly the case when a firm has monopsony (buying) power in the market
76
Monopsony employer
A monopsony producer has significant buying power in the labour market when seeking to employ extra workers. A monopsony employer may use their buying-power to drive down wage rates
77
Nash equilibrium
An idea important to game theory which describes any situation where all of the participants in a game are pursuing their best possible strategy given the strategies of all of the other participants
78
Natural monopoly
where economies of scale are so large relative to demand that the dominant producer in the industry will always enjoy lower costs of production than any other potential competitor
79
Negative externality
A negative externality occurs where a transaction imposes external costs on a third party (not the buyer or seller) who is not compensated by the market. The result is a loss of allocative efficiency and shown by a reduction in economic welfare
80
Non price competition
Non-price competition assumes increased importance in oligopolistic markets. Non-price competition involves advertising and marketing strategies to increase demand and develop brand loyalty among consumers.
81
Normal profit
Normal profit is the minimum level of profit required to keep the factors of production in their current use in the long run
82
Oligopoly
An oligopoly is a market dominated by a few producers, each of which has control over the market. However, oligopoly is best defined by the conduct (or behaviour) of firms within a market rather than its market structure
83
Operating costs
Another term for variable costs
84
Original income
Original income comes from wages and salaries in work, self-employment income, investment incomes
85
Overheads
Another term for fixed costs
86
Participation rate
The percentage of the population of working age in the labour force.
87
Peak pricing
When a business raises its prices at a time when demand has reached a peak - higher prices might be justified on the grounds of the higher marginal costs of supply at peak times
88
Penetration pricing
A pricing policy used to enter a new market, usually by setting a very low price
89
Perfect price discrimination
With perfect price discrimination, the firm separates the whole market into each individual consumer and charges them the price they are willing and able to pay
90
Polluter pays principle
The principle that firms which cause pollution should bear the cost of eradicating it, ameliorating it, or compensating those who have been affected by it
91
Pollution permit
A marketable pollution permit gives a business the right to emit a given volume of waste or pollution into the environment
92
Poverty trap
A situation in which a rise in income results in the recipient being worse off once tax has been paid and benefits withdrawn. The poverty trap acts as a disincentive for people on low incomes to earn some extra income from working extra hours or taking another job
93
Predatory pricing
When a business deliberately reduces price in the short run so as to force competitors out of the industry. Predatory pricing is illegal under current UK and EU competition law
94
Price discrimination
Price discrimination occurs when a firm charges a different price to different groups of consumers for an identical good or service, for reasons not associated with costs
95
Price fixing
Price fixing represents an attempt by suppliers to control supply and fix price at a level close to the level we would expect from a monopoly
96
Price leadership
Price leadership occurs when one firm has a clear dominant position in the market and the firms with lower market shares follow the pricing changes prompted by the dominant firm
97
Privatisation
Privatisation means the transfer of assets from the public (government) sector to the private sector. In the UK the process has led to a sizeable reduction in the size of the public sector of the economy
98
Producer surplus
Producer surplus is the difference between what producers are willing and able to supply a good for and the price they actually receive. The level of producer surplus is shown by the area above the supply curve and below the market price
99
Product differentiation
Product differentiation occurs when a business seeks to distinguish what are essentially the same products from one another by real or illusory means. This means that the assumption of homogeneous products made under conditions of perfect competition no longer applies
100
Product line pricing
It is frequently observed that a producer may manufacture many related products. They may choose to charge one low price for the core product (accepting a lower mark-up or profit on cost) as a means of attracting customers to the components / accessories that have a much higher mark-up or profit margin.
101
Product markets
Product markets are where businesses and consumers meet to buy and sell the output of goods and services produced by an economy
102
Production function
A mathematical relationship between the output of a business in a given time period and the inputs (factors of production) used to produce that output. We normally make a distinction between short run and long run production although this is often blurred in many industries
103
Profit maximisation
Profit maximisation occurs when marginal cost = marginal revenue (MC=MR)
104
Profit per unit
Profit per unit (or the profit margin) = AR - ATC
105
Profit related pay
Where part of the earnings of people working for a business are linked directly to the profits made by that business. Profit related pay is often used as an incentive to raise productivity
106
Regulatory capture
This is when the industries under the control of a regulatory body (i.e. a government agency) appear to operate in favour of the vested interest of producers rather than consumers
107
Rent seeking behaviour
Behaviour by producers in a market that improves the welfare of one but at the expense of another
108
Returns to scale
In the long run, all factors of production are variable. How output responds to a change in factor inputs is called returns to scale
109
Revenue
Revenue (or turnover) is the income generated from the sale of output in goods markets
110
Revenue maximisation
Revenue maximization is when MR = zero (i.e. when price elasticity of demand = 1)
111
Satisficing behaviour
Maximising behaviour may be replaced by satisficing which in essence involves the owners setting minimum acceptable levels of achievement in terms of revenue and profit.
112
Second degree price discrimination
This type of price discrimination involves businesses selling off packages of a product deemed to be surplus capacity at lower prices than the previously published/advertised price
113
Sex Discrimination Act
The Sex Discrimination Act of 1975 outlawed unequal opportunities for employment and promotion in the workplace because of gender and it set up the Equal Opportunities Commission
114
Short run
The short run is defined as a period of time where at least one factor of production is assumed to be in fixed supply
115
Shut down price
In the short run the firm will continue to produce as long as total revenue covers total variable costs or put another way, so long as price per unit > or equal to average variable cost (AR = AVC).
116
Social benefit
Social benefits refer to the total benefit to society from a good i.e. the benefit to individuals and any beneficial unintended spill-over effects on third parties
117
Spare capacity
When a firm or economy is able to produce more with existing resources
118
Static efficiency
Static efficiency occurs at a point in time and focuses on how much output can be produced now from a given stock of resources, and whether producers are charging a price to consumers that reflects fairly the cost of the factors used to produce a product.
119
Strategic entry deterrence
Strategic entry deterrence involves any move by existing firms to reinforce their position against other firms or potential rivals
120
Sub-normal profit
Sub-normal profit - is any profit less than normal profit (where price < average total cost)
121
Sunk costs
Sunk costs cannot be recovered if a business decides to leave an industry
122
Tacit collusion
Tacit collusion occurs where firms undertake actions that are likely to minimise a competitive response, e.g. avoiding price cutting or not attacking each other’s market
123
Total cost
Total cost = total fixed cost + total variable cost
124
Total revenue
Total revenue (TR) refers to the amount of money received by a firm from selling a given level of output and is found by multiplying price (P) by output i.e. number of units sold
125
Trade unions
Trade unions are organisations of workers that seek through collective bargaining with employers to protect and improve the real incomes of their members, provide job security, protect workers against unfair dismissal and provide a range of other work-related services including support for people claiming compensation for injuries sustained in a job.
126
Two part pricing tariffs
A fixed fee is charged (often with the justification of it contributing to the fixed costs of supply) and then a supplementary “variable” charge based on the number of units consumed
127
Variable cost
Variable costs are business costs that vary directly with output since more variable inputs are required to increase output
128
Vertical integration
Vertical Integration involves acquiring a business in the same industry but at different stages of the supply chain
129
Work leisure trade off
The choice labour makes between working more hours and taking more leisure when the rate of income tax changes.
130
X inefficiency
The lack of real competition may give a monopolist less of an incentive to invest in new ideas or consider consumer welfare
131
Perfect Competition
market structure where there are many buyers and sellers, where there is freedom of entry and exit to the market, perfect knowledge, and where all firms produce a homogeneous product
132
Horizontal Merger
merger between two firms in the same industry at the same stage of production
133
Vertical Merger
merger between two firms at different production stages in the same industry
134
Consumer Sovereignty
when resources are allocated according to the wishes of consumers (i.e.: in a perfectly free market)
135
Profit Maximization
MC = MR
136
Maximum Revenue
MR = 0
137
Optimal Allocation
when there are no externalities (MSB=MSC)
138
Productive Efficiency
production is at lowest cost (MC = AC)
139
Allocative Efficiency
occurs when no one can be made better off by transferring resources from one industry to another without making someone else worse off. (Price = MC) // this is the social optimum
140
Market failure
where resources are inefficiently allocated due to imperfections in the working of the market mechanism.
Negative: if net social cost is greater than net private cost.
Positive: if net social benefit is greater than net private benefit.
Internalizing: eliminating the externality by bringing it back into the framework of the market mechanism. (i.e.: extending property rights)
141
Private cost and benefit
cost or benefit to an individual economic unit such as a consumer or a firm.
142
Social cost and benefit
cost or benefit to society as a whole
143
Domestic Income
excludes the values of incomes generated by assets owned overseas and domestic assets owned by foreigners
144
National Income
sum total of all final goods and services produced in an economy over a period of time
145
Factor Cost
rent (land), wages (labour) interest (capital) profits (entrepreneurship)
146
Nominal
values unadjusted for the effects of inflation / values at current prices
147
Real
values adjusted for inflation
148
Macroeconomic Policy Objectives
Economic growth and development
Full employment
Price stability
External equilibrium
149
GDP
measure of national income before property income from abroad and depreciation have been accounted for
150
GDP (factor cost):
GDP (market prices) - Taxes (indirect) + Subsidies
151
GNP
a measure of national income including net property income from abroad but before depreciation
152
Multiplier
figure used to multiply a change in autonomous expenditure, such as investment, to find the final change in income / ratio of the final change in income to the initial change in autonomous expenditure
153
Accelerator Theory
theory that the level of planned investment is related to past
154
Absolute advantage
when a country is able to produce a good more cheaply in absolute terms than another country
155
Comparative advantage
when a country is able to produce a good more cheaply relative to other goods produced domestically than another country
156
Free Trade Areas
group of countries between which there is free trade in goods and services but which allows member counties to set their own level of tariffs against non-member countries
157
Customs unions
a regional economic association where tarriffs and quotas have been eliminated and common external tarriffs and quotas have been applied to member countries
158
Common markets
group of countries between which there is free trade in products and factors of production, and which imposes a common external tariff on imported goods from outside the market
159
Current Account
pare of Balance of payments where payments for the purchase and sale of goods and services are recorded
160
Capital Account
part of the B.o.P. where flows of savings, investment and currency are recorded
161
Current Balance
difference between total exports and total imports
162
Marshall-Lerner Condition
devaluation will result in an improvement on current account if the combined elasticities of demand for exports and imports are greater than 1 (more elastic better to devaluate
163
Terms of Trade
The amount of export goods needed to purchase a given amount of imported goods./ A weighted index showing how the price of imports have changed in terms of exports
164
Economic Growth
increase in GDP in the short-run or increasing the supply ability of the economy in the long-run (i.e. shifting LRAS to the right and the PPF outwards)
165
Economic Development
A measure of well-being not just in monetary terms but also in terms of other indicators i.e.) education, health, life expectancy
166
Human Development Index (HDI)
compares countries on the basis of real GDP per capita at PPP, life expectancy, education (literacy and school enrolment)
167
Human Suffering Index (HSI):
takes into account factors such as access to clean water, adequate food, and education
168
Valuing Natural Resources
takes into account growth without the destruction of natural capita
169
Measure of Economic Welfare (MEW
allows for leisure, non-marketed goods, public amenities, as well as economic "bads" like pollution or "regrettables" like defense spending
170
Net Social Product (NSP):
adjusts for positive and negative externalities to calculate social benefits and social costs, including pollution, divorce, crime and suicide rates
171
Geographical Immobility
Barriers to movement of workers between different areas.
172
Occupational Immobility
Barriers to workers changing occupations
173
Dependency ratio
The proportion of the population which is out of work (due to illness or old/young age) and so is reliant on the proportion of the population which is still in the workforce.
174
Marginal Revenue Product
the change in a firm's revenue resulting from employing one extra unit of labour
175
Flexible Labour Market
One that can adjust quickly and smoothly to changes in the demand for the supply of labour
176
Income Effect
The effect on the supply of labour caused by the changes in the ability to buy leisure
177
Substitution Effect
The effect on the supply of labour caused by a change in the opportunity cost of leisure
178
Wage Elasticity of Supply
the responsiveness of supply of labour to a change in the wage rate
179
Economic Rent
A surplus paid to a factor of production over and above what is needed to keep it in its current occupation
180
Transfer Earnings
The amount a factor of production could earn in its next best alternative occupation
181
Foreign Direct Investment(FDI
Long-term investment by private multinational corporations in countries overseas
Economics
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