Economics Unit 3 definitions

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Profit maximisation
MC=MR
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Revenue maximisation
MR = 0
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Sales maximisation
Sales max is producing at AC=AR and making only normal profit with the objective of increasing market share or preventing entry of new firms
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Satisficing
achieving a balance between profit and revenue maximisation, based on the relevant power of the stakeholder groups
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vertical integration
A merger between two firms in the same Industry at different stages of production
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Backward vertical integration
A merger between two firms in the same Industry at different stages of production.
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Forward vertical integration
A merger between two firms in the same Industry at different stages of production
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Horizontal integration
merging of two firms in the same industry and the same stage of the production process
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Conglomerate integration
merging of two firms in different industries with no obvious connection
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Demerger
separation of a previously merged firm
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Total revenue
P x Q
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Average revenue
TR / Q (or (P x Q)/Q = P)
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Marginal Revenue
change in TR/ change in Q
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Total cost
TFC + TVC
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Fixed Costs
costs that do not vary with output
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Variable Costs
costs that vary directly with output
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Average total cost
TC / Q
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Average fixed cost
TFC / Q
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Average variable cost
TVC / Q
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Marginal cost
change in TC / change in Q
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The law of diminishing returns
when additional amounts of a variable factor are applied to a fixed quantity of a fixed factor eventually marginal product and average product will fall. [so MC and AC will rise]
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Economy of Scale
reduction in LRAC due to an increase in size of the firm
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Diseconomy of Scale
increase in LRAC due to an increase in size of the firm
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Productive Efficiency
lowest point on AC curve (where AC = MC)
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Allocative Efficiency
P = MC (where MC cuts AR)
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Dynamic Efficiency
an improvement in efficiency in the long run
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X-inefficency
where a firm allows costs to drift above the efficient point due to managerial slack
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Normal profit
TR = TC – the amount needed to keep the firm in that industry in the long run[ cover the o/c of the entrepreneur]
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Supernormal profit
TR > TC above that required to keep the firm in the industry in the long run
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Marginal profit
the profit gaining from producing one additional unit (MP is 0 when MC=MR)
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Shut down point
AVC = AR
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Patent
legal right to be the sole supplier of a good or service for a number of years to allow a firm to recoup it spending on R and D through SN profit
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Barrier to entry
a factor that makes it difficult for a new firm to enter an industry
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Barrier to exit
a factor that makes it difficult for a firm to leave an industry
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Limit pricing
when a firm prices just below the AC of a potential new entrant. Requires moving away from Profit Maximisation and is only possible with EoS
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Predatory pricing
charging a price below AVC in the short run with THE DELIBERATE INTENTION OF forcing the exit of another firm to gain monopoly power in the long run
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Innocent barriers to entry
this is a barrier to entry which is due to an absolute cost advantage by the incumbent firm
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Strategic entry deterrent
a barrier to entry which is deliberately erected by the incumbent firm
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Sunk cost
a cost that cannot be recovered on exit from an industry – an irrecoverable cost.
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Concentration ratio
the combined market share of the x top firms in the industry
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Perfect Competition
an industry with homogeneous goods, perfect knowledge, many small buyers and sellers and low barriers to entry. The firms are price takers, and there is one market price.
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Monopoly
is a single supplier. A legal monopoly is a firm with more than 25% market share. The firm has the ability to set price.
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Natural monopoly
is an industry with constantly falling LRAC. There is only one firm in the industry because it would not be economically efficient to introduce competition.
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Price Discrimination
where a firm charges a different price for the same product in different markets.
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Monopsony
is a single buyer. The firm has the ability to set the price which it pays for the product.
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Oligopoly
where the industry is dominated by a few, large firms. There is a high concentration ratio
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Interdependence
where one firm’s decisions will have an impact on the others in the industry.
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Tacit or Implicit Collusion
An unspoken and unwritten agreement between two firms to avoid competition. Firms monitor each other’s behaviour and follow price and output decisions.
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Overt Collusion
Spoken or written agreement between two firms to avoid competition
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Explicit Collusion or Cartels
firms undertake a formal collusive agreement eg to not take part in price competition.
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Non-price competition
means of competition which avoids competing on price e.g. advertising.
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Game Theory
a study of outcomes when individual firms try to maximise their own profits in situations of interdependence.
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Monopolistic Competition
an industry with many buyers and sellers, all producing slightly differentiated products at a range of prices. There is free entry and exit and only normal profit can be made in the long run.
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Contestable market
a market which has low barriers to entry and exit. There are low or no sunk costs.
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OFT
body which aims to protect consumers, promote competition and may act as a surrogate for competition.
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Competition Commission (CC) or European Competition Commission (ECC)
a body which aims to protect consumers, promote competition and may act as a surrogate for competition.
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Anti-Competitive Behaviour
illegal action which works against the public interest, reduces consumer surplus or reduces competition in the market.
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Substantial Lessening of Competition (SLC)
the most important factor in OFT/CC decisions (since 2002 Enterprise Act)
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Criteria for investigating a merger or acquisition
merged firm controls >25% market share or £70m assets. If a SLC is believed to be the result.
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Industry regulator
a body responsible for regulating previously privatised industries. They act as a surrogate for competition, enforcing quality standards, and introducing, where appropriate, competition into the market.
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Price capping
when the regulator controls the prices charged by privatised firms.
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RPI – X
where price is changed by the RPI (a measure of inflation) and X where X is the reduction in prices expected as a result of improvements in efficiency.
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RPI + K
where price is changed by the RPI (a measure of inflation) plus K where K is the additional investment required by the regulator for improvements in quality or safety standards.
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Profit capping (rate of return regulation)
used in US. The regulator assesses an acceptable rate of return in the industry, and profits earned in excess are taxed at 100%.
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Privatisation
the transfer of ownership from the public sector to the private sector.
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Nationalisation
the transfer of ownership from the private sector to the public sector.
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Public Private Partnership (PPP)
where the public sector and private sector collaborate to deliver services.
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Contracting out/competitive tendering
where the public sector pays for a service, the deliver of which is bid for by private sector firms.
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Private Finance Initiative (PFI)
the private sector builds and maintains infrastructure which is then leased by the public sector.
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Bid rigging
where firms agree between themselves not to compete for bids, in order to achieve a higher price.
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Regulatory capture
where the regulator acts in the interests of the firm rather than the consumer interest. An example of Government failure.
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Performance Targeting
a goal which is set by the regulator for the firm to achieve e.g. improving customer service. Non achievement of targets will be result in a fine.
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Other cards in this set

Card 2

Front

Revenue maximisation

Back

MR = 0

Card 3

Front

Sales maximisation

Back

Preview of the front of card 3

Card 4

Front

Satisficing

Back

Preview of the front of card 4

Card 5

Front

vertical integration

Back

Preview of the front of card 5
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