Edexcel Econ 3 Flashcards

Simple flashcards with a term on one side and definition/formula on the other.

  • Created by: tom
  • Created on: 30-05-14 22:11
Profit Maximisation
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Revenue Maximisation
MR = 0
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Sales Maximisation
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Satisfying the shareholders with sufficient profit.
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Economies of Scale
Where larger firms have lower costs per unit of output in the long-run.
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Horizontal integration
When firms at the same stage of production in the same market merge. E.g. Cadbury and Kraft
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Vertical Integration
When two firms at different stages of production merge.
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Backward Vertical Integration
When a firm merges with one closer to the factors of production. E.g. A steel maker buying a coal mine.
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Forward Vertical Integration
When a firm merges with one closer to the consumer. E.g. A brewery buying a pub.
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Conglomerate Integration
When a firm merges with another in a different market. E.g. Virgin buying planes and trains.
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Price Taker
A firm that has no powers over the price it sells its goods at. E.g. A fisherman.
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Price Maker
A firm that has price setting powers.
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Normal Profit
The amount of profit needed to keep a firm in the market. AC = AR or TC = TR
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Law of Diminishing Marginal Returns
A short run theory that explains why MR slopes downwards and MC upwards. Additional workers don't contribute as much after a certain point and inefficiency increases.
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Productive Efficiency
Lowest point on AC curve. Where welfare to the consumer is maximised as price could not be lower.
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Allocative Efficiency
P = MC Where demand is equal to the amount it costs to produce the last unit.
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Perfect Competitiion
Many buyers and sellers. Buyers and sellers are price takers. AR = MR = D = P
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Supernormal Profits in a Perfect Competition Market
If AC is < P, the firm is said to make supernormal profit. This only occurs in the short run as in the long run, other firms enter the market and P decreases.
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Making a loss in perfect competition Markets
... Will result in firms leaving the market as there are no barriers to exit.
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A pure monopoly
When one firm supplies a good/service- 100% market share. Legally defined as being more than 25% of market share.
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Conditions of a monopoly:
One firm. High barriers to enter and exit. Profit maximisation. Downward sloping demand.
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Benefits of monopolies
Innovation. R&D. Investment.
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Costs of monopolies
Less choice. Higher prices. Lower quality- more inefficiency.
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Price discrimination
When a firm with some degree of market power charges more than one price for the same good or service to different people/groups.
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Three conditions of price discrimination
Different submarkets with different PEDs. Consumers cannot more between submarkets. The cost of keeping markers separate is less than the increased profits from doing so.
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When a firm is the sole buyer of a resource.
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Few firms dominating the market- high concentration ratio. High barriers to entry and exit. Profit maximise. Downward sloping demand. Interdependent.
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Game Theory
A set of ideas when look at strategies firms may use to make decisions, usually about price.
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Pay-off matrix
A table that shows that firms would be better off colluding. If they collude and charge a high price, they make more than if they undercut eachother and both charge a low price in the end.
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Predatory pricing
Cutting prices below the average cost of production. Short term measure used to undercut opponents and force them out of the market. Illegal.
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Limit pricing
Cutting the price to the point where new entrants to the market cannot compete. The firm can afford to do this due to it benefiting from economies of scale.
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Non-price competition
E.g. Advertising
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Price leadership
One firm changes its price and others follow to avoid a price war.
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Card 2


MR = 0


Revenue Maximisation

Card 3




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Card 4


Satisfying the shareholders with sufficient profit.


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Card 5


Where larger firms have lower costs per unit of output in the long-run.


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