Microeconomics (theme 3)

• ALLOCATIVE EFFICIENCY

  when resources are allocated to the best interest of society; there is maximum social welfare and maximum utility.
• AVERAGE COSTS

  the cost of production per unit
• AVERAGE REVENUE

  the price each unit is sold for
• BILATERAL MONOPOLY

  where there is only one buyer and one seller in the market
• CARTELS

  a formal collusive agreement where firms enter into an agreement to mutually set prices
• COLLUSION

  occurs when firms agree to work together, for example by fixing the quantity they produce
• COMPETITION POLICY

  government action to increase competition in markets
• COMPETITIVE TENDERING

  when the government contracts out of the provision of a good or service and invites firms to bid for the contract
• CONGLOMERATE INTEGRATION

  refers to the merging of 2 or more firms that have no connection; they are not in the same supply chain
• CONSTANT RETURNS TO SCALE

  output increases by the same proportion that the input increases by
• CONTESTABLE MARKET

  when there is the threat of new entrants into the market, forcing firms to be efficient
• DECREASING RETURNS TO SCALE

  an increase in inputs by a certain proportion will lead to output increasing by a smaller proportion
• DEMERGERS

  when a single business is broken into 2 or more businesses to operate on their own, to be sold or to be dissolved
• DEREGULATION

  the removal of legal barriers to allow private enterprises to compete in a previously protected market
• DERIVED DEMAND

  the demand for one good is linked to the demand for a related good
• DIMINISHING MARGINAL PRODUCTIVITY

  if a variable factor (e.g. labour) is increased when another factor is fixed (e.g. capital) then there will be a point where the extra unit of the variable factor will produce less output than the unit before resulting in marginal output decreasing
• DISECONOMIES OF SCALE

  the disadvantages that arise in large businesses that reduce efficiency and cause average costs to rise
• DIVORCE OF OWNERSHIP FROM CONTROL

  firms are owned by shareholders who have little say in the operations of a business and controlled by managers who have a big say in the operations. There objectives may be different resulting in the divorce
• DYNAMIC EFFICIENCY

  efficiency in the long-run; concerned with new technology and increases in productivity which causes efficiency to increase over a period of time.
• ECONOMIES OF SCALE

  the advantages of large scale production that enable a large business to produce at a lower average cost than a smaller business
• EXTERNAL EoS

  an advantage that arises from the growth of the industry within which the firm operates.
• FIXED COSTS

  costs that do not vary with output
• PROFIT BUSINESSES

  a business whose main aim is to make money / profits
• GAME THEORY

  used to predict the outcome of a decision made by one firm, which has incomplete information about the other firm
• GEOGRAPHICAL MOBILITY OF LABOUR

  the ease and speed at which labour can move from one area to another
• HORIZONTAL INTEGRATION

  the merger of firms in the same industry at the same stage of production
• INCREASING RETURNS TO SCALE

  an increase in inputs by a certain proportion will lead to an increase in output by a larger proportion
• INTERDEPENDENT

  the actions of one firm directly affects another firm
• INTERNAL EoS

  an advantage that a firm is able to enjoy because of the growth of the firm
• LIMIT PRICING

  when firms set prices low in order to prevent new entrants; used in contestable markets
• LOSS

  when a firm's revenue does not cover costs
• MARGINAL COSTS

  the additional cost of producing one extra unit of good
• MARGINAL REVENUE

  the additional revenue gained by selling one extra unit of good
• MAXIMUM WAGE

  a ceiling wage which people cannot earn above
• MINIMUM EFFICIENT SCALE

  the lowest level of output necessary to fully exploit economies of scale
• MINIMUM WAGE

  a floor wage which people can not earn below
• MONOPOLISTIC COMPETITION

  where there are a large number of buyers and sellers who are relatively small and act independently, selling non-homogeneous goods
• MONOPOLY

  a single seller in the market
• MONOPSONY

  a single buyer in the market
• N-FIRM CONCENTRATION RATIO

  the percentage of market share held by the 'n' biggest firms