ECON3 Key terms

Abnormal profit

Profit in excess of normal profit - also known as supernormal profit or monopoly profit. Abnormal profits may be maintained in a monopolistic market in the long run because of barriers to entry

Agency problem

Possible conflicts of interest that may result between the shareholders (principal) and the management (agent) of a firm

Anti-competitive behaviour

Strategies designed to limit the degree of competition inside a market

Asymmetric information

Where different parties have unequal access to information in a market

Average cost

Total cost per unit of output = Total cost / output = TC/Q

Average cost pricing

Setting prices close to average cost. It is a way to maximise sales, whilst maintaining normal profits. It is sometimes known as sales maximization

Average fixed cost

Total fixed cost per unit of output = TFC/Q

Average revenue

Total revenue per unit of output

Average variable cost

Total variable cost per unit of output = TVC/Q

Backward vertical integration

Acquiring a business operating earlier in the supply chain – e.g. a retailer buys a wholesaler, a brewer buys a hop farm

Barriers to entry

Ways to prevent the profitable entry of new competitors – they may relate to differences in costs between existing and new firms. Or the result of strategic behaviour by firms including expensive marketing and advertising spending

Batch production

When a factory makes a quantity of one form of a product or part, followed by a quantity of another different form

Behavioural economics

Branch of economic research that adds elements of psychology to traditional models in an attempt to better understand decision-making by investors, consumers and other economic participants

Bi-lateral monopoly

Where a monopsony buyer faces a monopsony seller in a market

Brand extension

Adding a new product to an existing branded group of products

Brand loyalty

The degree to which people regularly buy a particular brand and refuse to or are reluctant to change to other brands

Break-even output

The break-even price is when price = average total cost (P=AC)

Business ethics

Business ethics is concerned with the social responsibility of management towards the firm’s major stakeholders, the environment and society in general

Capacity

The amount that can be produced by a plant, company, or economy (industrial capacity) over a given period of time.

Capital intensive

When an industry or production process requires a relatively large amount of capital (fixed assets) or proportionately more capital than labour

Cartel

An association of businesses or countries that collude to influence production levels and thus the market price of a particular product

Collusion

Collusion takes place when rival companies cooperate for their mutual benefit. When two or more parties act together to influence production and/or price levels, thus preventing fair competition. Common in an oligopoly / duopoly

Competition Commission

Body that conducts in-depth inquiries into mergers, markets and the regulation of the major regulated industries such as water, electricity and gas

Competition Policy

Government policy which seeks to promote competition and efficiency in different markets and industries

Competitive advantage

When a

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