Theme 3 Flashcards
Synergy
The concept that the value and performance of two combined firms is greater than the sum of their individual parts
Williamson’s Utility Maximisation Theory
Theory that profit maximisation would not be the objective of the managers of a joint stock organisation. Utility maximisation is the manager’s sole objective.
Satisficing
Doing/making a sufficient amount of x (e.g. profit) to satisfy an economic agent, but not enough to maximise x. Coined by Herbert Simon in 1956. Carried out by decision makers under which optimal solution cannot be determined due to lack of information.
Ansoff’s Matrix
Shows the possible strategies open to a firm dependending on whether they want to produce existing products or new products; and to new markets or existing markets
Rationalisation
The process of decreasing average cost by cutting overlapping operations.
Niche market
A market for a specific and specialised type of commodity.
Sunk costs
- Opportunity costs that cannot be recovered upon leaving an industry e.g. lost consumer goodwill, asset writeoffs.
- As opposed to prospective costs: costs that have already been incurred.
Indivisibilities
The fact that some inputs, for example machinery, to not increase in proportion to the amount being produced. E.g. if 1 machine produces 5 outputs, 1/5 machine cannot be used to produce 1 output.
Arbitrage
The process of buying and selling the same product in different markets, in order to take advantage of the relative prices of the same commodity in different markets.
Hurdle Model of price discrimination
Consumers with higher incomes more willing to pay higher price for products in order to overcome ‘hurdle’ (e.g. paperback v hardback, new rather than used, earlier time) which low-income consumers willing to suffer.
Ramsey Problem/inverse elasticity rule
Police rule concerning what price a monopolist should be set by regulators in order to maximise social welfare, subject to constraint on normal profit. The higher the elasticity of demand for product the smaller the price markup should be.
Inventory investment
Production - sales. Positive inventory investment (production > sales) occurs when firm deliberately overproduces in order to meet an anticipated increase in demand. Economists view this as a form of spending, since the firm is buying the surplus produce off the market for storage.