Unit 3 Economics Definitions

  • Created by: Frances
  • Created on: 26-05-13 11:47
Allocative efficiency
Describes the extent to which the allocation of resources matches consumer preferences. The point where AR = MC.
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Backwards vertical merger
A firm merges with a firm closer to the suppliers in a production process.
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Occurs when firms make joint agreements to restrict output and increase price in order to maximise their joint profits.
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Cost plus pricing
Setting a price by adding a fixed amount or percentage to the cost of making or buying the product. In some ways this is quite an old-fashioned and somewhat discredited pricing strategy, although it is still widely used.
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Expanding into different markets.
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Dominate strategy
Is a situation in game theory where a player's best strategy is independent of those chosen by others.
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First degree price discrimination
Persuade all consumers in the market to reveal the price they are willing to pay.
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Forwards vertical merger
A firm merges with a firm closer to the market or consumers in a production process.
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Game theory
A special case of rational choice theory or strategic play, where humans are mostly reasonable but their decisions depend on the behaviour of others. This interdependence makes the strategies very hard to predict. A method of modelling of strategic
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Horizontal collusion
Most collusive activity takes place between firms in the same industry.
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Horizontal merger
Firms joining together at the same stage of the production process.
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Where the decisions of one are dependent on and also determine the decisions of others.
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Joint venture
The cooperation of two or more individuals or businesses in which each agrees to share profit, loss and control in a specific enterprise.
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Marginal costs
Costs of producing at one extra unit of output.
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The combining of two firms under one management. A merger is normally brought about by mutual agreement.
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Monopolistic competition
Occurs when there are many firms in the industry, each selling a slightly differentiated product. One firm's products are not perfect substitutes for another's so this means that the firms operating in the market are not price takers.
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A marker in which there is a single supplier. In practice this is unusual because in most markets there are alternatives of substitutes.
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Exists when there is only one buyer in the market.
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Nash equilibrium
This is a situation occurring within a game when each players chosen strategy maximises pay-offs given the other payers choice, so that no player has an incentive to alter behaviour.
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Normal profit
The entrepreneur receieves the minimum amount of profit to keep him/her in business. If there is less he/she will change industries or place resources into another venture or become an employee. Therefore normal profit can be seen as the wages of the
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A marker structure with a few firms having large shares of the market. It is only in this market structure that you are likely to see game theory being applied.
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Overt collusion
Where firms work together and there are agreements either spoken or written. The cooperation is open.
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Perfect competition
Perfect competition is a theoretical market structure. It is primarily used as a benchmark against which other market structures are compared. The industry that best reflects perfect competition in real life is the agricultural industry.
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Price discrimination
The charging of different prices in different markets where there are different Price Elasticities of Demand (PED).
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Price maker
A monopoly or a firm within monopolistic competition that has the power to influence the price it charges as the good it produces does not have perfect substitutes.
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Productive efficiency
Exists when production is achieved at the lowest possible cost. The point where the AC curve is at its lowest.
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Second degree price discrimination
The sale of different quantities of a good at different prices to same consumers.
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Supernormal profit
Extra profit above that level of normal profit. Supernormal profit occurs where AR>ATC. Supernormal profit is also known as abnormal profit. Abnormal profit means there is an incentive for other firms to enter the industry (if they can).
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Tacit collusion
Where firms work together, but there are no agreements either spoken or written. The cooperation is quiet or implied.
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One firm buying/owning a controlling share in another firm. This can be done in a hostile or a friendly way.
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The law of diminishing return
This states that when increasing quanitites of variable factors are used in combination with a fixed factor initially productivity will rise but eventually productivity will decline. Productivity is measured by output per head. This will only occur
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Third degree price discrimination
The sale of identical products at different prices to different groups of consumers.
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Vertical collusion
Refers to the methods used by manufacturers to restrict the way in which retailers can market their product.
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Backwards vertical merger


A firm merges with a firm closer to the suppliers in a production process.

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Cost plus pricing


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