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Econ - MICRO > Theme 3 Key Terms > Flashcards

Theme 3 Key Terms Flashcards

1
Q

Allocative efficiency

A
  • when resources are allocated to produce goods and services which consumers want and value the most highly, and social welfare is maximised. P = MC
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2
Q

asymmetric information

A

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

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3
Q

Average cost/average total cost (AC/ATC)

A
  • The cost of production per unit
    total costs / quantity produced
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4
Q

avg fixed cost (AFC)

A

total fixed cost / output

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5
Q

avg variable cost (AVC)

A

total variable cost / output

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6
Q

Average Revenue (AR)

A
  • the price each unit is sold for
  • demand curve
  • TR / quantity sold
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7
Q

barometric firm price leadership

A
  • where a firm develops a reputation for being good at predicting the next move in an industry and other firms decide to follow their lead
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8
Q

bilateral monopoly

A

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

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9
Q

cartels

A

a formal collusive agreement where the firms agree to mutually set prices (overt)

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10
Q

collusion

A

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

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11
Q

competition policy

A

govt action/policies to increase competition in markets

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12
Q

competitive tendering

A

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

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13
Q

conglomerate integration

A

the merger of firms with no common connection
e.g. Comcast (cable provider) and General Electric (industrial) bought NBC (content producer).

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14
Q

constant returns to scale

A

output increases by the same proportion that the inputs increase by

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15
Q

contestable market

A

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

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16
Q

cross subsidisation

A

when a large firm uses profits from one sector to subsidise a price war in another sector, allowing them to sell at a competitive price (or maybe a loss) to force other firms out the market

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17
Q

decreasing returns to scale

A

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

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18
Q

degree of contestability

A
  • measured by the extent to which the gains from market entry for a firm exceed the costs of entering the market
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19
Q

demergers

A

a single business is broken into two or more businesses to operate on their own, to be sold or dissolved
- Pepsi emerged from Pizza Hut, KFC and Taco Bell to focus on comp with Coca-Cola (1997)

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20
Q

deregulation

A

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

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21
Q

derived demand

A

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

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22
Q

diminishing marginal productivity

A
  • 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
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23
Q

diseconomies of scale

A

the disadvantages that arise in large businesses that reduce efficiency and cause average costs to rise
- decreasing returns to scale (output increases by a smaller % than inputs)

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24
Q

divorce of ownership from control

A
  • firms are owned by shareholders, who have little say in the day-to-day running of the business and are controlled by managers
  • this leads to the principle-agent problem
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25
Q

dynamic efficiency

A

efficiency of resource allocation and use over time. related to the ability of an economy/firm to adapt, innovate, and improve resource allocation continually with changing market conditions, consumer preferences, and tech, leading to long-term economic growth and welfare enhancement

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26
Q

economies of scale

A

the advantages of large-scale production that enable a large business to produce at a lower average cost than a smaller business
increasing returns to scale:
- increase in inputs (%) will lead to a greater % increase in output

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27
Q

external economies of scale

A

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

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28
Q

fixed cost

A

costs which do not vary with output

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29
Q

for-profit business

A

a business whose main aim is to make money + maximise financial benefits for shareholders
- almost all priv sector businesses

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30
Q

game theory

A

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

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31
Q

geographical mobility of labour

A

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

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32
Q

horizontal integration

A

the merger of firms in the same industry at the same stage of production
- disney bought Fox’s assets for over $70bn so can now use their stuff eg. Avatar.

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33
Q

incumbent firm

A
  • businesses already established in each market or industry
  • may have adv of loyal customer base & achieved internal economies of scale, avg costs lower than other firms in market
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34
Q

increasing returns to scale/economies of scale

A

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

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35
Q

interdependent

A

the actions of one firm directly affects another firm

36
Q

internal economies of scale

A

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

37
Q

limit pricing

A
  • when firms set prices low (the limit price), low enough to discourage other firms entering, but high enough they make normal profit
  • increased barrier to entry, mainly in contestable markets
38
Q

loss

A

when revenue does not cover costs

39
Q

LRAC curve

A
  • boundary representing minimum level of average costs attainable at any given level of output
  • points below LRAC are unattainable, above LRAC is inefficient
40
Q

marginal cost

A

the additional cost of producing one extra unit of good
change in total cost/change in output

41
Q

marginal revenue (MR)

A

the additional revenue gained by selling one extra unit of good
- Change in total rev / change in output

42
Q

maximum wage

A

a ceiling wage which people cannot earn above

43
Q

minimum efficient scale

A

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

44
Q

minimum wage

A

a floor wage that people cannot earn below

45
Q

monopolistic competition

A

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

46
Q

monopoly

A

a single seller in the market

47
Q

monopsony

A

a single buyer in the market

48
Q

n firm concentration ratio

A

the % of market share held by the ‘n’ biggest firms

49
Q

nash equilibrium

A
  • where neither player in game theory is able to improve position, and has optimised their output based on the other players decision.
50
Q

nationalisation

A

when a private sector comany or industry is brought under state control, to be owned and managed by the govt

51
Q

natural monopoly

A
  • where economies of scale are so large that not even a single producer can fully exploit them
  • it is more efficient for there to be a monopoly than many sellers
52
Q

non-collusive oligopoly

A

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

53
Q

non price competition

A
  • when firms compete on factors other than price, e.g. customer service or quality
  • they aim to increase the loyalty to the brand which makes demand more inelastic
54
Q

normal profit

A
  • the minimal reward required to keep entrepreneurs supplying their enterprise, the return sufficient to keep the factors of production committed to the business
  • TC = TR
55
Q

not-for-profit business

A
  • where firms are run to maximize social welfare and help individuals and groups
  • any profit they do make is used to support their aim
56
Q

occupational mobility of labor

A

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

57
Q

oligopoly

A

where a few firms dominate the market and have the majority of market share, they act interdependantly

58
Q

organic growth

A

where firms grow by increasing their output (↑ investment or labour)
- e.g. LEGO

59
Q

overt collusion

A

collusion is where firms come to a formal agreement, for example, a cartel

60
Q

perfect competition

A

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

61
Q

perfectly contestable market

A

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

62
Q

predatory pricing

A

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

63
Q

price leadership

A

where one firm has advantages (size or lower costs) so = dominant firm, sets prices and other firms tend to follow this firm as they are fearful of engaging in a price war (tacit)

64
Q

price wars

A

where the firms continuously drop prices down to the point where they are frequently making losses and firms are forced to leave, giving them more market share

65
Q

principal-agent problem

A
  • 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
66
Q

private sector

A

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

67
Q

privatisation

A

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

68
Q

productive efficiency

A
  • when the minimum resources are used to give the maximum possible output at the
    lowest possible cost, produced at lowest AC
    MC = AC
69
Q

profit maximisation

A
  • when firms produce at a point which derives the greatest profit
  • MC = MR
70
Q

profit satisficing

A

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

71
Q

public sector

A

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

72
Q

regulatory capture

A
  • when regulators become more empathetic and can ‘see things from the firms perspective’
  • removed impartiality and weakens their ability to regulate
73
Q

revenue maximization

A
  • when firms produce at a point that derives the greatest revenue
  • MR = 0
74
Q

sales maximisation

A
  • when firms produce at a point where they sell as many of their goods and services as possible without making a loss
  • AR = AC
75
Q

static efficiency

A

efficiency of resource allocation and the maximization of overall societal welfare at a given point in time, without considering changes over time. concerned with the immediate allocation of resources to achieve the best possible outcome at a specific moment

76
Q

sunk cost

A

costs that cannot be recovered once they have been spent/if the business leaves the industry

77
Q

supernormal profit

A
  • the profit above normal profit
  • TR > TC
78
Q

tacit collusion

A

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

79
Q

third degree price descrimination

A

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

80
Q

total cost

A
  • the cost to produce a given level of output
  • TVC + TFC
81
Q

total fixed cost (TFC)

A

costs that dont change with output and remain constant
e.g. rent, machinery

82
Q

total variable cost (TVC)

A
  • costs that change directly with output
    e.g. materials
83
Q

total revenue

A
  • total amount of money coming into business from the sale of goods + services
  • price x quantity sold
84
Q

trade unions

A

an organisation with members who are usually workers or employees, which protect the rights an pay fo workers through a process of collective bargaining

85
Q

variable cost

A

costs which change with output

86
Q

vertical integration

A

when a firm merges or takes over another firm in the same industry, but at a different stage of production
- e.g. Tesco’s £3.7bn takeover of Booker, 2018

87
Q

x inefficiency

A

when a lack of effective/real competition in a market or industry means that average costs are higher than they would be with competition (when firms produce at a cost above the AC curve)
e.g businesses happy with satisficing profits, allowing a degree of organisational slack, and rising AC of labour as wages rise, or overemployment occurs.

Econ - MICRO (3 decks)

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