AQA Econ3 Key Terms

The definitions of key terms for Unit 3 for AQA A-Level Economics

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Time Differences

Long Run

the period of time when all factor inputs can be varied, but the state of technology remains constant.

Short Run

the period of time when at least one factor input into the production process can be varied

Very Long Run

the period of time when the state of technology can change

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Average Cost

the average cost of production per unit, calculated by divinding the total cost by quanity produced. it is equal to average variable cost + average fixed cost

Economic Cost

the oppotuniry cost on an input to the production process

Marginal Cost

the cost of producing an extra unit of output

Total Cost

the cost of producing any gievn level of output. it is equal to total variable cost + total fixed cost

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Average Revenue

the average receipts per unit sold. it is equal to total revenue divided by quanitity sold

Marginal Revenue

the addition to total revenue of an extra unit sold

Total Revenue

the total money received from the sale of any given quantity of output

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(Dis)economies of Scale

Diseconomies of scale

a rise in the long run average costs of production as output rises

External Economies of Scale

falling average costs of production, shown by a downward shift in the average cost curve, which result from a growth in the size of the industry within which a firm operates

Internal Economies of Scale

economies of scale which arise because of growth in the scale of production within a firm

Law of Diminishing Returns

if increasing quantities of a variable input are combined with a fixed input, eventually the marginal product and then the average product of that variable input will decline

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Minimum Efficient Scale of production

the lowest level of output at which long run average cost is minimised

Optimal Level of production

the range of output over which long run average cost is lowest

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Business Objectives

Profit Satisficing

making sufficient profit to satisfy the demands of shareholders

Cost-Plus pricing

the technique adopted by firms of pixig a price for their products by adding a fixed percentage profit margin to the long run average cost of production

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Market Structure

Barriers to Entry

factors which make it difficult or impossible to enter an industry and compete with existing producers

Sunk Costs

costs of production which are not recoverable if a firm leaves the industry

Concentration Ratio

the market share of the largest firms in an industry 341

Abnormal Profit

any profit made over and above normal profit

Price Discrimination

charging a different price for the same good or service in different markets

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sole producer in an industry, able to price discriminate and create abnormal profits


small number of firms in the idustry and each firm is independen with other firms. barriers to entry are likely to exist

Perfect Competition

large number of small firms, homogenous product, price takers, no barriers to entry or exit, perfect knowledge

Monopolistic Competition

large number of small firms, non-homogenous products, no barriers to entry or exit

Contestable Market

freedom of entry to the industry, where costs of exit are low

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Game Theory

Collusive Oligopoly

where several oligopolistic firms agree amongst themselves to engage anti-competitive practices such as fixing prices or output with a view to raise their profitability

Prisoners' Dilemma

a game where, given that neither player knows the strategy of the other player, the optimum strategy for each player leads to a worse situation than had they known the strategy of the other player and been able to co-operate and co-ordinate their strategies

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Theories of Firms

Limit Pricing

when a firm, rather than short run profit maximising, sets a low enough price to dete new entrants from coming into the market (contestable market)


inefficiency arising because a firm or other productive organisation fails to minimise its costs of production

Price Follower

a firm which sets its price by reference to the prices ser by the price leader in a market

Price Leadership

when one firm, the price leader, sets its own prices and other firms in the market set their prices in relationship to the price leader

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Welfare Economics

Welfare Economics

the study of how an economy can best allocate resources to maximise the utility or economic welfare of its citizens

Optimal Allocation of Resources

occurs when resources are efficiently used in such a way as to maximise the welfare or utility of consumers

Relative Poverty

poverty which is defined relative to existing living standards for the average individual

Absolute Poverty

when individuals do not have resources to be able to consume sufficient necessities to survive

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Progressive, Regressive and Proportional Tax

taxes where the proportion of income paid in tax rises, falls or remains the same respectively as income rises

Wage Determination

Mobility of Labour

occupational or geographical. the extent to which workers are able/willing to move between jobs


occupational flexibility- ability of workforce to perform different tasks and to apply transferable skills

contractual flexibility- part time works, monthly contracts, 0 hour contracts

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Demand for Labour

Marginal Physical Product

the physical addition to output of an extra unit of variable factor of production

Marginal Revenue Product

the value of the physical addition to output of an extra unit of a variable factor of production. in a perfectly competitive product market where marginal physical product times the price of the good produced

Total Physical Product

the total output of a given quantity of factors of production

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