THEME 3 SUMMARY

• What is allocative efficiency?


  When resources are allocated to the best interests of society, maximizing social welfare and utility.
• What does the equation P=MC signify in allocative efficiency?


  It indicates that the price of a good equals the marginal cost of producing it.
• What is asymmetric information?


  When one party has more information than the other, leading to market failure.
• How does asymmetric information affect regulators?


  It causes problems for regulators trying to ensure fair market practices.
• What does average cost (AC) refer to?


  The cost of production per unit.
• What is average revenue?


  The price each unit is sold for.
• What is a bilateral monopoly?


  Where there is only one buyer and one seller in the market.
• What is a cartel?


  A formal collusive agreement where firms mutually set prices.
• What is collusion?


  When firms agree to work together, such as setting a price or fixing production quantities.
• What is competition policy?


  Government action to increase competition in markets.
• What is competitive tendering?


  When the government invites firms to bid for the contract to provide a good or service.
• What is conglomerate integration?


  The merger of firms with no common connection.
• What are constant returns to scale?


  Output increases by the same proportion that the inputs increase by.
• What is a contestable market?


  When there is the threat of new entrants into the market, forcing firms to be efficient.
• What are decreasing returns to scale?


  An increase in inputs by a certain proportion leads to output increasing by a smaller proportion.
• What are demergers?


  A single business is broken into two or more businesses to operate independently.
• What is deregulation?


  The removal of legal barriers to allow private enterprises to compete in a previously protected market.
• What is derived demand?


  The demand for one good linked to the demand for a related good.
• What is diminishing marginal productivity?


  If a variable factor is increased while another factor is fixed, each extra unit will produce less extra output than the previous unit.
• What are diseconomies of scale?


  The disadvantages in large businesses that reduce efficiency and cause average costs to rise.
• What is the divorce of ownership from control?


  Firms are owned by shareholders who have little say in daily operations, leading to the principal-agent problem.
• What is dynamic efficiency?


  Efficiency in the long run, concerned with new technology and increases in productivity.
• What are economies of scale?


  The advantages of large-scale production that enable lower average costs than smaller businesses.
• What are external economies of scale?


  An advantage arising from the growth of the industry, independent of the firm itself.
• What are fixed costs?


  Costs that do not vary with output.
• What are for-profit businesses?


  A business whose main aim is to make money.
• What is game theory?


  Used to predict the outcome of a decision made by one firm with incomplete information about another firm.
• What is geographical mobility of labour?


  The ease and speed at which labour can move from one area to another.
• What is horizontal integration?


  The merger of firms in the same industry at the same stage of production.
• What are increasing returns to scale?


  An increase in inputs by a certain proportion leads to a larger increase in output.
• What does interdependent mean in a market context?


  The actions of one firm directly affect another firm.
• What are internal economies of scale?


  An advantage a firm enjoys due to its own growth, independent of other firms.
• What is limit pricing?


  When firms set prices low to prevent new entrants into the market.
• What is a loss in economic terms?


  When revenue does not cover costs.
• What is marginal cost?


  The additional cost of producing one extra unit of good.
• What is marginal revenue?


  The additional revenue gained by selling one extra unit of good.
• What is a maximum wage?


  A ceiling wage which people cannot earn above.
• What is minimum efficient scale?


  The lowest level of output necessary to fully exploit economies of scale.
• What is minimum wage?


  A floor wage which people cannot earn below.
• What is monopolistic competition?


  Where there are many buyers and sellers who act independently, selling non-homogenous goods.