Paper 1

• Allocative efficiency


  When resources are allocated to the best interests of society, where there is maximum social welfare and maximum utility; P=MC
• Asymmetric information


  Where one party has more information than the other, leading to market failure and causing problems for regulators
• Average cost/average total cost (AC/ATC)

  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 setting a price or fixing the quantity they produce
• Competition policy


  Government action to increase competition in markets
• Competitive tendering


  When the government contracts out the provision of a good or service and invites firms to bid for the contract
• Conglomerate integration


  The merger of firms with no common connection
• Constant returns to scale

  Output increases by the same proportion that the inputs increase 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


  A single business is broken into two 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 is increased when another factor is fixed, there will come a point when each extra unit of the variable factor will produce less extra output than the previous unit; after a certain point, marginal output falls
• 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 day to day running of the business, and controlled by managers; this leads to the principal-agent problem
• 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 economies of scale

  An advantage which arises from the growth of the industry within which the firm operates, independent of the firm itself
• Fixed cost


  Costs which do not vary with output
• For profit businesses


  A business whose main aim is to make money
• 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 economies of scale

  An advantage that a firm is able to enjoy because of growth in the firm, independent of anything happening to other firms or the industry in general
• Limit pricing


  When firms set prices low in order to prevent new entrants; used in contestable markets
• Loss


  When revenue does not cover costs
• Marginal cost


  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 cannot earn below
• Monopolistic competition


  Where there are a large number of buyers and sellers who are relatively small and act independently, selling non-homogenous goods
• Monopoly


  A single seller in the market
• Monopsony


  A single buyer in the market