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Economics > Unit 3 Definitions > Flashcards

Unit 3 Definitions Flashcards

1
Q

Vertical integration

A

Merger with a firm at a different stage of the production process in the same industry

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2
Q

Horizontal integration

A

Merger with a firm in the same stage of the production process in the same industry

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3
Q

Conglomerate mergers

A

Merger between firms in unrelated industries

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4
Q

Satisficing

A

Making enough money to keep shareholders happy but not aiming to maximise profits

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5
Q

Demerger

A
  • The separation of a larger firm into two or more smaller organizations
  • Often as the reversal of a previous merger
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6
Q

Short-run

A

A time period where at least one factor of production is fixed

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7
Q

Long-run

A

A time period where all factors of production are variable

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8
Q

Variable costs

A

Costs that change proportionately with output

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9
Q

Fixed costs

A

Costs that do not vary with output

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10
Q

Marginal cost

A

The addition cost of one more unit of output produced

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11
Q

Average costs

A

Average cost per unit of output

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12
Q

Economies of scale

A

A fall in long-run average costs as output increases

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13
Q

Diseconomies of scale

A

A rise in long-run average cost as output increases

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14
Q

Sales maximisation

A

Where AC=AR

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15
Q

Revenue maximisation

A

Where MR=0

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16
Q

Profit maximisation

A

Where MC=MR

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17
Q

Productive efficiency

A

Where MC=AC, at the bottom of the AC curve

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18
Q

Allocative efficiency

A

Where P=MC, resources are distributed according to consumer preference so social welfare is maximized

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19
Q

Price fixing

A

Firms coming together to ensure that prices remain stable, thus avoiding price competition

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20
Q

Merger

A

The joining together of at least two firms to form one entity

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21
Q

Competitive tendering

A

When the government contracts out the provision of a good or service and invites private sector firms to bid on them

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22
Q

Dynamic efficiency

A

Achieved when resources are allocated efficiently over time

23
Q

X- inefficiency

A

Occurs when a firm fails to minimize its average cost at a given level of output often due to a lack of competition motivation

24
Q

Details of perfect competition

A
  • Perfect knowledge, homogenous goods, many buyers and sellers, no barriers to entry or exit
  • No economies of scale; many buyers and sellers producing small amounts
  • Can only make normal profit long run; no barriers to entry and perfect knowledge
  • Profit maximize (MC=MR) and price takers (MR=AR)
  • Productive and allocative efficiency; no dynamic efficiency because of the existence of perfect knowledge, so the invention of one firm will be adopted by another, so investment will give firms no competitive benefit
25
Details of monopolistic competition
- Many buyers and sellers, product differentiation, no barriers to entry or exit - Long run can only make normal profit because there is no barriers to entry or exit - No economies of scale; many buyers and sellers producing small amounts - Firms are only able to make normal profit long run so AC=AR and profit maximize so MR=MC - No allocative or productive efficiency, likely to be dynamically efficient due to product differentiation however, firms are small so may not have the retained profits to do so
26
Diminishing marginal productivity
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. Business constraints. For example, if a restaurant (land) is fixed but they keep increases labour, employees will have less to do and become less productive
27
External economies of scale
An advantage which arises from the growth of the industry which the firm operates in - Transport links - Improvement in technology link to communication (e.g. email) - Government policy, e.g. deregulation and tax rates
28
Game theory
Used to predict the outcome of a decision made by one firm, when it has incomplete information about the other firm
29
Interdependent
The actions of one firm directly effect another firm
30
Limit pricing
When firms set prices low in order to prevent new entrants; used in contestable markets
31
Minimum efficiency scale (MES)
The lowest level of output necessary to fully exploit economies of scale
32
Monopoly
A single seller in the market
33
Monopsony
A single buyer in the market
34
Nationalization
Where a private company or industry is bought under state control, to be owned and controlled by the government
35
Natural monopoly
Where economies of scale are so large that not even a single producer is able to fully exploit them; it is more efficient for there to be a monopoly then many sellers
36
Collusion
Occurs when firms agree to work together, for example by setting a price or fixing the quantity they produce
37
Derived demand
The demand for one good is linked to the demand for a related good
38
Details of an oligopoly
- Product differentiation, interdependent, high barriers to entry and exit, high-concentration ratio - Non-price competition; price cutting leads to price wars which results in loss of revenue) - Profit maximization is not sole objective (market share plays a crucial role) - No productive or allocative efficiency, able to explore economies of scale, dynamically efficient - LR can make supernormal profit
39
Principle-agent problem
Where the agent makes decisions on behalf of the principle; the agent should maximize the benefit of the principle but have the temptation of maximizing their own benefit
40
Privatization
The process of selling a firms owned and controlled by the government to investors in the private sector
41
Sunk costs
Costs that cannot be recovered once they have been spent
42
X-inefficiency
When firms produce at a cost above the AC curve
43
Assumptions of contestable markets
- No barriers to entry or exit - Low or no sunk costs - Perfect information - Low costumer loyalty - No collusion - Equal access to production techniques
44
Hit and run entry and when can it occur
When existing firms price above cost and there are no or low barriers to entry and exit, firms will quickly enter a market for supernormal profit then exit
45
What is price discrimination and the 3 types?
- Where firms charge different prices to different consumers for the same product - 1st degree; charge each consumer the maximum price they are willing to pay - 2nd degree; price varying by quantity sold e.g. bulk discount - 3rd degree; prices vary upon groups based on their willingness to pay
46
What are the conditions for 3rd-degree price discrimination?
- Sufficient market power - Ability to separate groups - Sufficient market information
47
Dynamic pricing and examples
- Changing prices in real time based on market conditions - Uber
48
Income effect
As wages increase, spending increases
49
Substitution effect of labour
Higher wages increase opportunity cost of leisure
50
Geographical mobility
Ability of workers to move between different locations for employment opportunities
51
Occupational mobility
Ability of workers to move between different occupations or job roles
52
Types of supply side reforms
Privatisation Deregulation Toughening competition policy
53
Social tarrif
Typical with oligopolies, where third-price discrimination leads to lower-income consumers having better prices. For example those receiving certain benefits get discounted broadband packages, energy bills and water bills

Economics (11 decks)

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