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Economics Theme 3

Terms in this set (82)

monopoly
Market with one seller with high barriers to entry
third degree price discrimination
practice of dividing consumers into two or more groups with separate demand curves and charging different prices to each group
monopolistic competition
A market structure in which barriers to entry and exit are low and many firms produce slightly differentiated products
Demerger
When a firm splits into two or more independent businesses
horizontal merger
the joining of two firms at the same stage of production in the same industry
vertical merger
the joining of two firms at different stages of the same industry
backward merger
the merging with a firm at the previous stage of production
forward merger
the merging with a firm at the next stage of production
conglomerate merger
the merging of firms in different industries
regulatory capture
where those regulating the market act in the interest of the industry and not consumers
Nationalisation
Governments take control of privately run businesses.
Privatisation
The sale of public sector organisations to the private sector
Competitive tendering
the government introduces competition among private sector firms which have to place bids for work being contracted out by the public sector
deregulation
the removal of some government controls over a market
performance targets
where the regulator sets targets for firms on their performance- e.g. time to fix problems etc
quality standards
setting a standard that all firms must meet
profit regulation
allows a monopoly to make a certain percent of profit
price regulation
limits the price that a monopolist is allowed to charge
demand for labour
the number of workers a firm is willing and able to employ at a given wage rate
derived demand
where demand for a good is dependent on the demand for a final product
Economies of scale
as output rises the average costs fall
factors influencing demand for labour
-rise in demand for final product
-increase in the productivity of labour which makes labour more cost efficient than capital
-government employment subsidy
-profitability of firms
factors influencing supply for labour
-size of working population
-migration
geographical mobility of labour
where labour can easily move between locations for employment
geographical immobility of labour
where workers face difficulty in moving between locations for employment
Diseconomies of scale
as output rises the average costs rise
occupational mobility of labour
The ability of labour to change occupations to take available work
occupational immobility of labour
where workers find it difficulty to move between occupations
Internal economies of scale
cost advantages occur when the business itself grows
External economies of scale
occur within an industry and benefit all businesses
Total costs
total fixed costs + total variable costs
Average costs
Total costs / output ....... costs per unit
Marginal costs
the extra cost of producing one more unit of output
Total revenue
Price x Quantity
Average revenue
total revenue divided by the quantity sold
Marginal revenue
extra revenue from the sale of one additional unit of output
maximum wage
the wage ceiling above which firms cannot pay workers
minimum wage
the wage floor below which firms cannot pay workers
monopsony
Market with only one buyer
bilateral monopsony
a market with both a monopsony and monopoly
Natural monopoly
a market that runs most efficiently when one large firm supplies all of the output- e.g. gas, electricity
Elasticity of demand for labour
the responsiveness of the quantity demanded of labour given a change in wages
Elasticity of supply of labour
the responsiveness of the quantity supplied of labour given a change in wages
sunk costs
costs that cannot be recovered e.g. advertising
Barriers to entry and exit
It is a characteristic of a market that prevents new firms from joining, or leaving, the market
Example barriers to entry
-brand loyalty
-patents
-economies of scale
-geographical barriers
-first mover advantage
Contestable markets
a market structure where there is freedom of entry and exit. There are low sunk costs. The threat of competition should be sufficient to keep prices low and prevent abuse of monopoly power.
profit maximisation
MC=MR
non-price competition
competition based on factors other than price
price competition
competition based on price
price wars
a series of competitive price cuts that lowers the market price
predatory pricing
selling a product below average cost to drive competitors out of the market
limit pricing
reducing the price of a good to just above average cost to deter the entry of new firms into the market. Prices are set at levels which are likely to make it unprofitable for potential entrants.
game theory
study of strategic interaction where one player's decision depends on what the other player does. What the opponent does also depends upon what he thinks the first player will do.
Overt collusion
When firms openly agree on price, output, and other decisions aimed at achieving monopoly profits.
tacit collusion
where firms make informal agreements or collude without actually speaking to their rivals.
collusion
secret agreement or cooperation to seek profits
n-firm concentration ratio
a measure of the market share of the largest n firms in an industry
oligopoly
A market structure in which a few large firms dominate a market, firms are interdependent
Interdependence
means that firms must take into account the likely reactions of their rivals to any change in price, output or forms of non-price competition
perfect competition
a market structure in which a large number of firms all produce homogenous products, no barriers to entry and exit
allocative efficiency
where P=MC
productive efficiency
where average costs are minimised
dynamic efficiency
Occurs when resources are allocated efficiently over time, firms become more productive
X-inefficiency
occurs when a firm produces output at a higher cost than is necessary to produce it
normal profits
AR=AC
Supernormal profit
extra profit above that level of normal profit.
loss
where AC is greater than AR
Short run shut down point
P = AVC
Long run shut down point
Where the AR curve is tangential to the AC curve. The firm can just make normal profits.
minimum efficient scale (MES)
the lowest point on the long run average cost curve and is also known as an output range over which a business achieves productive efficiency
average variable costs
total variable costs / quantity
sales maximisation
occurs where AR=AC
Revenue maximisation
occurs where MR=0
Satisficing
where managers aim to make just enough profit to satisfy owners
organic growth
firms grow naturally to increase sales
Constraints on business growth
-size of the market
-access to finance
-owner objectives
-regulation
for profit organisation
firms who aim to make a profit
not-for-profit organisation
organisations that do not seek to make profit
private sector organisations
Organisations owned by individuals or companies
public sector organisations
Organisations that are owned and controlled by the state
divorce of ownership/ principal agent problem
where the owners and managers may have different objectives - e.g. maximise profit v minimise effort
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