Full definitions for Unit 3 Economics

All the definitions that are needed for Unit 3 Economics Edexcel

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Harry Bindloss
UNIT 3 ­ Key terms
Allocative Efficiency: Describes the extent to which the allocation of resources matches
consumer preferences. The point where AR=MC.
Backwards vertical merger: A firm merges with a firm closer to the suppliers in a
production process.
Collusion: Occurs when firms make joint agreements to restrict output and increase price in
order to maximise their joint profits.
Cost plus pricing: Setting a price by adding a fixed amount or percentage to the cost of
making or buying the product. In some ways this is quite an old-fashioned and somewhat
discredited pricing strategy, although it is still widely used.
Diversification: Expanding into different markets.
Dominate Strategy: Is a situation in game theory where a player's best strategy is
independent of those chosen by others.
First degree price discrimination: Persuade all consumers in the market to reveal the
price they are willing to pay.
Forwards vertical merger: A firm merges with a firm closer to the market or consumers in
a production process.
Game Theory: A special case of rational choice theory or strategic play, where humans are
mostly reasonable but their decisions depend on the behaviour of others. This
interdependence makes the strategies very hard to predict. A method of modelling of
strategic interaction between firms in an oligopoly.
Horizontal collusion: Most collusive activity takes place between firms in the same industry
Horizontal Merger: Firms joining at the same stage of the production process.
Interdependence: Where the decisions of one are dependent on and also determine the
decisions of others
Joint Venture: The cooperation of two or more individuals or businesses in which each
agrees to share profit, loss and control in a specific enterprise.
Marginal Costs: Cost of producing at one extra unit of output.
Merger: The combining of two firms under one management a merger is normally brought
about by mutual agreement.

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Harry Bindloss
Monopolistic competition: Occurs when there are many firms in the industry, each selling
a slightly differentiated product. One firm's products are not perfect substitutes for
another's so this means that the firms operating in the market are not price takers.
Monopoly: A market in which there is a single supplier. In practice this is unusual because in
most markets there are alternatives of substitutes.
Monopsony: Exists when there is only one buyer in the market.…read more

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Harry Bindloss
Takeover: One firm buying/owning a controlling share in another firm. This can be done in a
hostile or a friendly way.
The law of diminishing returns: This states that when increasing quantities of variable
factors are used in combination with a fixed factor initially productivity will rise but eventually
productivity will decline. Productivity is measured by output per head. This will only occur in
the short run.…read more



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