Economics definitions

  • Created by: 123liv
  • Created on: 15-04-17 14:51
Diseconomies of scale
Occur for a firm when an increase in the scale of production leads to higher long-run average costs. This is often associated with managerial difficulties
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Dominant strategy
A situation in game theory where a player's best strategy is independent of those chosen by others
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Dynamic efficiency
A view of efficiency that takes into account the effect of innovation and technical progress on productive and allocative efficiency in the long run
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Economies of scale
What happens if an increase in a firm's scale of production leads to production at lower long-run average cost
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Economies of scope
Economies arising when average costs fall as a firm increases output across a range of different products
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External economies of scale
Economies of scale that arise from the expansion of the industry in which a firm is operating
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Firm
An organisation that brings together factors of production in order to produce output
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Fixed costs
Costs that do not vary with the level of output - these can occur in the short run only
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Forward integration
A process under which a firm merges with a firm that is involved in a later part of the production chain
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Game theory
A method of modelling the strategic interaction between firms in an oligopoly
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Horizontal integration
The result of a horizontal merger
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Horizontal merger
A merger between two firms at the same stage of production in the same industry
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Industry long-run supply curve (LRS)
Under perfect competition, the curve that, for the typical firm in the industry, is horizontal at the minimum point of the long-run average cost curve
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Internal economies of scale
Economies of scale that arise from the expansion of a firm
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Law of diminishing returns
A law stating that if a firm increased its inputs of one factor of production while holding inputs of the other factor fixed, it will eventually derive diminishing marginal returns from the variable factor
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Limit price
The highest price that an existing firm can set without enabling new firms to enter the market and make a profit
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Long run
The period over which the firm is able to vary the inputs of all its factors of production, but the state of technology remains constant
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Marginal cost
The cost of producing an additional unit of output
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Marginal physical product of labour (MPPL)
The additional quantity of output produced by an additional unit of labour input
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Marginal productivity theory
A theory which argues that the demand for labour depends upon balancing the revenue that a firm gains from employing an additional unit of labour against the marginal cost of that unit of labour
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Marginal revenue
The additional revenue gained by a firm from selling an additional unit of output
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Marginal revenue product of labour (MRPL)
The additional revenue received by a firm as it increases output by using an additional unit of labour input, i.e. the marginal physical product of labour multiplied by the marginal revenue received by the firm
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Market structure
The market environment within which firms operate
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Minimum efficient scale
The level of output at which long-run average cost stops falling as output increases
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Minimum wage
A government-set minimum wage rate below which firms are not allowed to pay
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Monopolistic competition
A market that shares some characteristics of monopoly and some of perfect competition
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Monopoly
A form of market structure in which there is a single buyer of a good, service of factor of production
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Multinational corporation
A firm that conducts its operations in a number of countries
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N-firm concentration ratio
A measure of the market share of the largest n firms in an industry
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Nash equilibrium
A situation occurring within a game when each player's chosen strategy maximises payoffs given the other player's choice, so that no player has an incentive to alter behaviour
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Natural monopoly
Monopoly that arises in an industry in which there are such substantial economies of scale (relative to market demand) that one firm in the industry will always enjoy lower costs of production than any other potential competitor
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Non-pecuniary benefits
Benefits offered to workers by firms that are not financial in nature
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Normal profit
Profit that covers the opportunity cost of capital and is just sufficient to keep the firm in the market
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Oligopoly
A market with few sellers, in which each firm must take account of the behaviour and likely behaviour of rival firms in the industry
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Oligopsony
A market in which there are few buyers of a good, service or factor of production
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Ouvert collusion
A situation in which firms openly work together to agree on prices or market shares
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Participation rate
The proportion of the population of working age who are in employment or seeking work
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Perfect competition
A form of market structure that produces allocative and productive efficiency in long-run equilibrium
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Perfect/first-degree price discrimination
A situation arising in a market whereby a monopoly firm is able to charge each consumer a different price
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Predatory pricing
An anti-competitive strategy in which a firm sets price below average variable cost in an attempt to force a rival or rivals out of the market and achieve market dominance
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Price taker
A firm that must accept whatever price is set in the market as a whole
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Principal-agent (agency) problem
A problem arising from conflict between the objectives of the principals and those of the agents to take decisions on their behalf
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Prisoners' dilemma
An example of game theory with a range of applications in oligopoly theory
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Private Finance Initiative (PFI)
A funding agreement under which the private sector designs, builds, finances and operates an asset and associated services for the public sector in return for an annual payment linked to its performance in delivering the service
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Product differentiation
A strategy adopted by firms that marks their product as being different from their competitors'
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Productive efficiency
Occurs when firms have chosen appropriate combinations of factors of production and produce the maximum output possible from those inputs, thus producing at minimum long-run average cost
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Public-private partnership (PPP)
An arrangement by which a government service of private business venture is funded and operated through a partnership of government and the private sector
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Regulatory capture
A situation in which the regulator of an industry comes to represent the industry's interests rather than regulating it. It is an example of government failure.
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Relevant market
A market to be investigated under competition law, defined in such a way that no major substitutes are omitted but no non-substitutes are included
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Satisficing
Behaviour under which the managers of the firm aims to produce satisfactory results for the firm, e.g. in terms of profits, rather than trying to maximise them
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Short run
The period over which a firm is free to vary the input of one of its factors of production (labour), but faces a fixed input of the other (capital)
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Short-run supply curve
For a firm operating under perfect competition, the curve is given by its short-run marginal cost curve above the price at which MC=SAVC; for the industry, the horizontal sum of the supply curves of the supply curves of the individual firms
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Static efficiency
Efficiency at a particular point in time
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Sunk costs
Short-run costs that cannot be recovered if the firm closes down
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Supernormal profits/abnormal profits/economic profit
Terms referring to profits that exceed normal profit
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Tacit collusion
A situation occurring when firms refrain from competing on price, but without communication or formal agreement between them
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Third-degree price discrimination
A situation in which a firm is able to charge groups of consumers a different price for the same product
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Variable costs
Costs that vary with the level of output
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Vertical merger
A merger between two firms in the same industry, but at different stages of the production process
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X-inefficiency
A situation arising when a firm is not operating at minimum cost, perhaps because of organisational slack
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Allocative efficiency
Achieved when society is producing the appropriate bundle of goods and services relative to consumer preferences. The firm is producing where P=MC of production
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Arbitrage
A process by which prices in two market segments are equalised by the purchase and resale of products by market participants
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Average cost
Total cost divided by the quantity produced
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Backward integration
A process under which a firm merges with a firm that is involved in an earlier part of the production chain.
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Barrier to entry
A characteristic of a market that prevents new firms from readily joining the market. These can be legal barriers imposed by government in the form of permits or patents required before a firm may participate in an industry, or they may be created by
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contd.
the firm in the form of advertising, brand loyalty or technical expertise
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Cartel
An agreement between firms on price and output with the intention of maximising their joint profits.
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Competition policy
A set of measures designed to promote competition in markets and protect consumers in order to enhance the efficiency of markets
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Competitive tendering
A process by which the public sector calls for private firms to bid for a contract to provide a good or service. They will charge the government for the particular task and seek to make a profit
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Conglomerate merger
A merger between two firms operating in different markets
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Constant returns to scale
Found when long-run average cost remains constant with an increase in output, i.e.when output and costs rise at the same rate.
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Contestable market
A market in which the existing firm makes only normal profit, as it cannot set a higher price without attracting entry, owing to the absence of barriers to entry and sunk costs. This sort of market is synonymous with 'hit and run' profits
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Contracting out
A situation in which the public sector places activities in the hands of a private firm and pays for the provision
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Corporate social responsibility
Actions that a firm takes in order to demonstrate its commitment to behaving in the public interest
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Cost-plus pricing
A pricing policy whereby firms set their price by adding a mark-up to average cost
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Derived demand
Demand for a good or service not for its own sake, but for what it produces, e.g. labour is demanded for the output it produces
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Demerger
The separation of a larger firm into town or more smaller organisations, often as the un-merging of an earlier merger
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Total costs
These will include all the rewards to the factors of production, i.e. wages (labour), rent (land), interest (capital), normal profit (entrepreneur)
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Average cost
Average cost per unit of output
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Profit maximisation
Occurs where MC=MR. It is where the firm maximises profit (difference between total revenue and total cost is greatest) or minimises losses
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Revenue maximisation
When a firm maximises total revenue. This occurs where marginal revenue=0
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Sales maximisation
When a firm maximises sales of its output while achieving normal profit. When the objective of the firm, this is usually subject to a profit satisfying constraint
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Collusion
Firms, often operating under oligopoly conditions, working together to fix prices and avoid price wars
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Price fixing
Firms coming together to ensure that prices remain stable and therefore price competition is avoided
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Price discrimination
The sale of the same good to two different markets at different prices. To do this, a firm must be a monopolist able to identify two different groups and keep them separate
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Divorce of ownership from control
Occurs when the managers and directors of a business are a different group of people from the owners of the business
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Market niche/niche market
A small segment of a much larger market
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Not-for-profit organisations
Organisations that do not have making a profit as a goal but use any profit or surplus they generate to support their aims
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Organic or internal growth
A firm increasing its size through investment in capital equipment or an increased labour force
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Private sector organisations
Organisations that are owned by individuals or companies and not the state
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Public sector organisations
Organisations that are owned and controlled by the state
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Synergy
When two or more activities or firms put together can lead to greater outcomes than the sum of the individual parts
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Average revenue
The average receipts per unit sold. It is equal to total revenue divided by quantity sold
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Total revenue
The money received from the sale of any given quantity of output
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Average product
The quantity of output per unit of factor input. It is the total product divided by the level of output
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Marginal product
The addition to output produced by an extra unit of output. It is the change in total output divided by the change in the level of inputs
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Returns to scale
The change in percentage output resulting from a percentage change in all factors of production.
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Increasing returns to scale
The percentage increase in output is greater than the percentage increase in factors employed (decreasing RTS is it is less)
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Very long run
The period of time when the state of technology may change
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Total product
The quantity of output measured in physical units produced by a given number of inputs over a period of time
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Average cost
The average cost of production per unit, calculated by dividing the total cost by the quantity produced. It is equal to variable cost + average fixed cost
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Average fixed cost
Total fixed cost divided by the number of units produced
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Average variable cost
Total variable cost divided by the number of units produced
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Economic cost
The opportunity cost of an input to the production process
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Imputed cost
An economic cost which a firm does not pay for with money to another firm but is the opportunity cost of factors of production which the firm itself owns.
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Optimal level of production
The range of output over which long run average cost is lowest
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Semi-variable cost
A cost which contains within it a fixed cost element and a variable cost element
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Total cost
The cost of producing any given level of output. It is equal to total variable cost + total fixed cost
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Total fixed cost
The value of the cost of production which does not vary however many units are produced
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Total variable cost
The overall cost of these factors of production that vary directly with the amount produced
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Break-even point
The levels of output where total revenue equals total cost
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Barriers to exit
Factors which make it difficult or impossible for firms to cease production and leave an industry
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Brand
A name, design, symbol or other feature that distinguishes a product from other similar products and which makes it non-homogenous
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Homogenous goods
Goods made by different firms but which are identical
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Imperfect competition
A market structure where there are several or a relatively large number of firms in the industry, each of which has the ability to control the price that it sets for its products
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Independence
In market theory, when the actions of one firm will have no significant impact on any other single firm in the market
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Interdependence
In market theory, when the actions of one firm will have an impact on other firms in the market
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Market concentration
The degree to which the output of an industry is dominated by its largest producers
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Market share
The proportion of sales in a market taken by a firm or group of firms
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Non-homogenous goods
Goods which are similar but not identical made by different firms, such as branded goods
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Perfect knowledge or information
Exists is all buyers in a market are fully informed of prices and quantities for sale, whilst producers have equal access to information about production techniques
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Product differentiation
Aspects of a good or service which serve to distinguish one product from another such as product formulation, packaging, marketing or availability
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Uncertainty
In market theory, when one firm does not know how other firms in the market will react if it changes strategy such as changing its price
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Concentrated market
A market where most of the output is produced by a few firms and where therefore concentration ratio is high
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Duopoly
An industry where there are only two firms
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Market conduct
The behaviour of firms, such as pricing policies, promotion of products, branding and collusion with other firms
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Marketing mix
Different elements with a strategy designed to create demand for a product and profits for a firm
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Payoff matrix
In game theory, shows the outcome of a game for the players given different possible strategies
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Price follower
A firm which sets its price by reference to the prices set by the price leader in a market
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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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Price war
A situation where several firms in a market repeatedly lower their prices to outcompete other firms; the objective may be to gain or defend market share
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Monopoly or pure monopoly
Market structure where one firm supplies all output in the market without facing competition because of high barriers to entry to the market
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Monopoly power
Exists when firms are able to control the price they charge or their product in a market
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Hit and run competition
When firms can enter a market at low cost attracted by high profits and the leave the market at low cost when profits fall
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Consumer sovereignty
Exists when the economic system allocates resources totally according to the preferences of consumers
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Technical efficiency
Achieved when a given quantity of output is produced with the minimum number of inputs
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Welfare economics
The study of how an economy can best allocate its resources to maximise utility or economic welfare of its citizens
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Creative destruction
A process where firms produce or create innovative new products that replace or destroy existing products in the market; e.g. internet leading to significant shift of spending in physical high street shops to online shopping
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Multi-plant monopolist
The sole producer in an industry but where production takes place at a number of different sites or plants, each of which could be sold off to provide competition in the industry
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Deregulation
The process of removing government controls from markets
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Nationalisation
The transfer of firms or assets from private sector ownership to state ownership. It is the opposite of privatisation
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Privatisation
The transfer of organisations or assets from state ownership to private sector ownership. It is the opposite of nationalisation
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Elasticity of demand for labour
The responsiveness of the quantity demanded of labour to changes in the price of labour, the wage rate.
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Total physical output
The total output of a given quantity of factors of production
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Unit labour costs
Cost of employing labour per unit of output or production
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Economically active
The number of workers in the workforce who are in a job or are unemployed
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Net migration
Immigration minus emigration
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Population of working age
Size of the population ages between the school leaving age and the state retirement age
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Workforce or labour force or working population
Those economically active and therefore in work or seeking work
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Workforce jobs
The number of workers in employment. It excludes the unemployed
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Bilateral monopoly
When a single buyer faces a single seller in a market. In a labour market, this is most likely to occur when government is the single buyer of a type of labour and the workforce is unionised, so that the trade union acts as a single seller
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Sole proprietor
One person owns and manages. Exclusive owner of a business, entitled to keep all profits after tax has been paid but liable for all losses, a sole trader
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Partnerships
Usually when you need more money in order to grow. Share risk and ideas and same jobs§
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Joint stock/private companies
Don't sell shares on the stock markets, decided by the owner (where sold), e.g. popular in Germany. Sold for cash to finance more growth, expert guidance
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Public limited companies (plc)
Public, can buy stocks. Limited means limited liability - can only lose what you put in (cannot claim the personal assets of the shareholders to recover amounts owed by the company (about risk and reward))
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Card 2

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A situation in game theory where a player's best strategy is independent of those chosen by others

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Dominant strategy

Card 3

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A view of efficiency that takes into account the effect of innovation and technical progress on productive and allocative efficiency in the long run

Back

Preview of the back of card 3

Card 4

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What happens if an increase in a firm's scale of production leads to production at lower long-run average cost

Back

Preview of the back of card 4

Card 5

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Economies arising when average costs fall as a firm increases output across a range of different products

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Preview of the back of card 5
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