ECONOMICS

• Microeconomics


  Abnormal, supernormal or economic profits: Profits above normal profits
• Allocative efficiency


  Achieved when society is producing the appropriate bundle of goods and services relative to consumer preferences
• Average cost


  Total cost divided by the quantity produced; sometimes known as unit cost
• Average revenue


  The average revenue received by the firm per unit of output; it is total revenue divided by the quantity sold
• Barrier to entry


  A characteristic of a market that prevents new firms from readily joining the market
• Behavioural economics


  A branch of economics that builds on the psychology of human behaviour in decision making
• Cartel


  An agreement between firms on price and output with the intention of maximising their joint profits
• Competition policy


  An area of economic policy designed to promote competition within markets to encourage efficiency and protect consumer interests
• Conglomerate merger


  A merger between two firms operating in different markets
• Constant returns to scale

  Found when long-run average cost remains constant with an increase in output — in other words, when output and costs rise at the same rate
• Contestable market


  A market in which the existing firm makes only normal profit, as it cannot set a price higher than average cost without attracting entry, owing to the absence of barriers to entry and sunk costs
• Corporate social responsibility


  Actions that a firm takes in order to demonstrate its commitment to behaving in the public interest
• Derived demand


  Demand for a good not for its own sake, but for what it produces, e.g. labour is demanded for the output that it produces
• Discount


  A process whereby the future valuation of a cost or benefit is reduced (discounted) in order to provide an estimate of its present value
• Discrimination


  A situation in a labour market where some people receive lower wages that cannot be explained by economic factors
• Diseconomies of scale


  Occur for a firm when an increase in the scale of production leads to higher long-run average costs
• Dominant strategy


  A situation in game theory where a player's best strategy is independent of those chosen by others
• Dynamic efficiency


  A view of efficiency that takes into account the effect of innovation and technical progress on productive and allocative efficiency in the long run
• Economic rent


  A payment received by a factor of production over and above what would be needed to keep it in its present use
• Economically active


  Active in the labour force, including the employed, the self-employed and the unemployed
• Economies of scale


  Occur for a firm when an increase in the scale of production leads to production at lower long-run average cost
• Economies of scope


  Economies arising when average cost falls as a firm increases output across a range of different products
• External economies of scale

  Economies of scale that arise from the expansion of the industry in which a firm is operating
• Externality


  A cost or a benefit that is external to a market transaction, borne (or enjoyed) by a third party, and not reflected in market prices
• Firm


  An organisation that brings together factors of production in order to produce output
• Fixed costs


  Costs that do not vary with the level of output
• Game theory


  A method of modelling the strategic interaction between firms in an oligopoly
• Horizontal merger


  A merger between two firms at the same stage of production in the same industry
• Human capital


  The stock of skills and expertise that contribute to a worker's productivity
• ILO unemployment rate

  Measure of the percentage of the workforce who are without jobs but are available for work, willing to work and looking for work
• Income effect of a price change

  Reflects the way that a change in the price of a good affects purchasing power
• Industry long-run supply curve (LRS)

  Under perfect competition, the curve that, for the typical firm in the industry, is horizontal at the minimum point of the long-run average cost curve
• Internal economies of scale

  Economies of scale that arise from the expansion of a firm
• Internalising an externality


  An attempt to deal with an externality by bringing an external cost or benefit into the price system
• Labour productivity


  A measure of output per worker, or output per hour worked
• Law of diminishing marginal utility


  States that the more units of a good that are consumed, the lower the utility from consuming those additional units
• Law of diminishing returns

  A law stating that if a firm increases its inputs of one factor of production while holding inputs of the other factor fixed, eventually the firm will get diminishing marginal returns from the variable factor
• Living wage


  An estimate of how much income households need to afford an acceptable standard of living
• Long run


  The period over which the firm is able to vary the inputs of all its factors of production
• Marginal cost


  The cost of producing an additional unit of output