Economics Unit 3 definitions

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Profit maximisation
MC=MR
1 of 72
Revenue maximisation
MR = 0
2 of 72
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
3 of 72
Satisficing
achieving a balance between profit and revenue maximisation, based on the relevant power of the stakeholder groups
4 of 72
vertical integration
A merger between two firms in the same Industry at different stages of production
5 of 72
Backward vertical integration
A merger between two firms in the same Industry at different stages of production.
6 of 72
Forward vertical integration
A merger between two firms in the same Industry at different stages of production
7 of 72
Horizontal integration
merging of two firms in the same industry and the same stage of the production process
8 of 72
Conglomerate integration
merging of two firms in different industries with no obvious connection
9 of 72
Demerger
separation of a previously merged firm
10 of 72
Total revenue
P x Q
11 of 72
Average revenue
TR / Q (or (P x Q)/Q = P)
12 of 72
Marginal Revenue
change in TR/ change in Q
13 of 72
Total cost
TFC + TVC
14 of 72
Fixed Costs
costs that do not vary with output
15 of 72
Variable Costs
costs that vary directly with output
16 of 72
Average total cost
TC / Q
17 of 72
Average fixed cost
TFC / Q
18 of 72
Average variable cost
TVC / Q
19 of 72
Marginal cost
change in TC / change in Q
20 of 72
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]
21 of 72
Economy of Scale
reduction in LRAC due to an increase in size of the firm
22 of 72
Diseconomy of Scale
increase in LRAC due to an increase in size of the firm
23 of 72
Productive Efficiency
lowest point on AC curve (where AC = MC)
24 of 72
Allocative Efficiency
P = MC (where MC cuts AR)
25 of 72
Dynamic Efficiency
an improvement in efficiency in the long run
26 of 72
X-inefficency
where a firm allows costs to drift above the efficient point due to managerial slack
27 of 72
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]
28 of 72
Supernormal profit
TR > TC above that required to keep the firm in the industry in the long run
29 of 72
Marginal profit
the profit gaining from producing one additional unit (MP is 0 when MC=MR)
30 of 72
Shut down point
AVC = AR
31 of 72
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
32 of 72
Barrier to entry
a factor that makes it difficult for a new firm to enter an industry
33 of 72
Barrier to exit
a factor that makes it difficult for a firm to leave an industry
34 of 72
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
35 of 72
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
36 of 72
Innocent barriers to entry
this is a barrier to entry which is due to an absolute cost advantage by the incumbent firm
37 of 72
Strategic entry deterrent
a barrier to entry which is deliberately erected by the incumbent firm
38 of 72
Sunk cost
a cost that cannot be recovered on exit from an industry – an irrecoverable cost.
39 of 72
Concentration ratio
the combined market share of the x top firms in the industry
40 of 72
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.
41 of 72
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.
42 of 72
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.
43 of 72
Price Discrimination
where a firm charges a different price for the same product in different markets.
44 of 72
Monopsony
is a single buyer. The firm has the ability to set the price which it pays for the product.
45 of 72
Oligopoly
where the industry is dominated by a few, large firms. There is a high concentration ratio
46 of 72
Interdependence
where one firm’s decisions will have an impact on the others in the industry.
47 of 72
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.
48 of 72
Overt Collusion
Spoken or written agreement between two firms to avoid competition
49 of 72
Explicit Collusion or Cartels
firms undertake a formal collusive agreement eg to not take part in price competition.
50 of 72
Non-price competition
means of competition which avoids competing on price e.g. advertising.
51 of 72
Game Theory
a study of outcomes when individual firms try to maximise their own profits in situations of interdependence.
52 of 72
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.
53 of 72
Contestable market
a market which has low barriers to entry and exit. There are low or no sunk costs.
54 of 72
OFT
body which aims to protect consumers, promote competition and may act as a surrogate for competition.
55 of 72
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.
56 of 72
Anti-Competitive Behaviour
illegal action which works against the public interest, reduces consumer surplus or reduces competition in the market.
57 of 72
Substantial Lessening of Competition (SLC)
the most important factor in OFT/CC decisions (since 2002 Enterprise Act)
58 of 72
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.
59 of 72
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.
60 of 72
Price capping
when the regulator controls the prices charged by privatised firms.
61 of 72
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.
62 of 72
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.
63 of 72
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%.
64 of 72
Privatisation
the transfer of ownership from the public sector to the private sector.
65 of 72
Nationalisation
the transfer of ownership from the private sector to the public sector.
66 of 72
Public Private Partnership (PPP)
where the public sector and private sector collaborate to deliver services.
67 of 72
Contracting out/competitive tendering
where the public sector pays for a service, the deliver of which is bid for by private sector firms.
68 of 72
Private Finance Initiative (PFI)
the private sector builds and maintains infrastructure which is then leased by the public sector.
69 of 72
Bid rigging
where firms agree between themselves not to compete for bids, in order to achieve a higher price.
70 of 72
Regulatory capture
where the regulator acts in the interests of the firm rather than the consumer interest. An example of Government failure.
71 of 72
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.
72 of 72

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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