PMT Theme 3

• What is allocative efficiency?

  When resources are allocated to maximize social welfare and utility, where \( P = MC \).
• What does asymmetric information lead to in a market?

  It leads to market failure and problems for regulators.
• What does average cost (AC) represent?

  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 are cartels?

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

  When firms agree to work together, such as setting prices or fixing 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 provision of 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 as inputs increase.
• What is a contestable market?

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

  An increase in inputs leads to a smaller increase in output.
• What are demergers?

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

  The removal of legal barriers to allow competition in a protected market.
• What is derived demand?

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

  Increasing a variable factor while another is fixed leads to less output from each additional unit.
• What are diseconomies of scale?

  Disadvantages in large businesses that reduce efficiency and raise average costs.
• What is the divorce of ownership from control?

  Shareholders own firms but have little say in daily operations, leading to the principal-agent problem.
• What is dynamic efficiency?

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

  Advantages of large-scale production that lower average costs.
• What are external economies of scale?

  Advantages arising from industry growth 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 outcomes of decisions made by firms with incomplete information.
• 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 production stage.
• What are increasing returns to scale?

  An increase in inputs leads to a larger increase in output.
• What does interdependent mean in economics?

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

  Advantages 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 in contestable markets.
• 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 a minimum efficient scale?

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

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

  Where there are many buyers and sellers acting independently, selling non-homogenous goods.
• What is a monopoly?

  A single seller in the market.
• What is a monopsony?

  A single buyer in the market.