Monday, December 19, 2011

List of Definitions for Unit 3: Business Economics and Economics Efficiency

Hello there fellow readers! Happy new year! This is the long awaited list of definitions and also the last one for the time being. The Unit 4: Global Economy glossaries will be available somewhere in the near future. Please take note that those BOLD words are the one that are most likely to be tested in the Section A of the multiple choice questions

Just a gentle reminder. All the economic terms below are of equal importance. Even if they are not tested, they might still be very useful if you want to show to the examiners your ability to master and use the economic jargons correctly, particularly questions (b)*, (c)*and (d)* of Section B

Stay tune for the next posting on Unit 1: Competitive Markets-How They Work and Why They Fail. I will reveal 11 questions that are most likely to be tested

1. Fixed costs (FC): costs that do not change with the level of output/ costs that change not because of the level of output but rather the scale of operation

2. Variable costs (VC): costs that change with the level of output

3. Total costs (TC): sum of both fixed and variable costs/ (TFC + TVC)

4. Average fixed costs (AFC): total fixed costs for every one unit of output/ (TFC/Q)/ difference between average costs (AC) and average variable costs (AVC)

5. Average variable costs (AVC): total variable costs for every one unit of output (TVC/Q)

6. Average costs (AC): total costs for every one unit of output/ (TC/Q)

7. Marginal costs (MC): an additional total costs due to extra one unit of output produced/ (ΔTC/ ΔQ)

8. Total revenue (TR): total receipts for a firm from the sale of any given quantity of a product/ (PxQ)

9. Average revenue (AR): total revenue for every one unit of output/ (TR/Q)

10. Marginal revenue (MR): additional total revenue due to extra one unit of output sold (ΔTR/ ΔQ)

11. Economies of scale (EOS): fall in long run average costs (LRAC) due to increase in output

12. Purchasing economies of scale: when a large firm purchases raw materials and parts in big quantity, it will be able to negotiate for a better discount and hence lower down the input costs

13. Technical economies of scale: when a large firm invests in new technology, it will be able to produce in greater volume thus resulting in lower unit costs since high capital costs are spread over greater output

14. Managerial economies of scale: when a large firm can afford to hire specialist workers who are expert in their own areas, the costs of running each department can be lowered

15. Financial economies of scale: when a large firm borrows huge amount of money, it will be subjected to lower interest rate charge and hence lower costs due to the perception that big firms are more financially stable and hence carry lower default risk

16. Transport economies of scale: when a large firm establishes its own logistic unit, it can result in lower transportation costs than depending on an external logistic firm that is likely to charge much higher

17. External economies of scale: fall in long run average costs (LRAC) due to external factors/ positive externalities such as increase in number of skilled workers over the time

18. Diseconomies of scale: rise in long run average costs associated with rise in output/ further increase in size of operation

19. External diseconomies of scale: rise in long run average costs associated with external factors such as increase in market wages or costs of raw materials

20. Profit maximisation: when a firm produces up to the level of output where MC = MR/ when MC-MR =0

21. Revenue maximisation: when a firm produces up to the level of output where MR = 0

22. Sales maximisation: when a firm produces up to the level of output where AC= AR

23. Profit satisficing: when a firm tries to produce satisfactory profits rather than maximum profits to at least keep the shareholders happy as it has some other goals to pursue such as sales maximisation

24. Cost-plus pricing: a pricing method where a desired percentage of profit is added to the estimated cost

25. Supernormal/ abnormal profits: economic profits that are made when AR > AC/ when TR > TC

26. Normal profits: when economic profits equal to zero/ when AC = AR/ when TC = TR/ the minimum level of profit needed for a company to remain competitive in a market

27. Losses/ subnormal profits: when AR< AC

28. Perfect competition: a market structure with large number of sellers where each being a price taker and goods produced are homogenous/ identical

29. Monopoly: a market structure with a sole seller where goods and services produced have no close substitutes/ a firm that has more than 25% of market share by legal definition

30. Monopsony: exists when there is only one buyer in the market/ existence of a dominant buyer

31. Oligopoly: a market structure dominated by few large firms that are highly interdependent

32. Duopoly: a market structure with two companies owning all or nearly the entire market for a given type of good or service

33. Monopolistic: a market structure with large number of sellers (not as many as in perfect market) where each firm has some price making ability and goods produced are differentiated

34. Concentration ratio: total percentage of market share contributed by the top 3 to 5 firms in the industry

35. Perfect knowledge/ information: when buyers in a market are fully informed of prices and quantities for sale, whilst producers have equal access to information on the best production techniques

36. Imperfect competition: a market structure with several or large number of firms with each having the ability to control the price

37. Limit pricing: when a firm sets a low enough price to deter new entrants from coming into the market

38. Predatory pricing: when a dominant firm is selling a good or service at a very low price or even at loss/ below AC intending to drive competitors out of the market

39. Price skimming: a pricing strategy in which a firm charges the highest initial price that customers are willing to pay and over the times lowers the price to attract price-sensitive segment

40. Sunk costs: costs that are not recoverable when a firm leaves the industry

41. Natural monopoly: a situation in which there cannot be more than one efficient provider of a good or service or otherwise competition might actually increase costs and prices/ occurs when one large business can supply to the entire market at a lower price than two or more smaller ones/ a situation where it is viable only for one firm to exist rather than few so that significant economies of scale can be achieved

42. Price discrimination: the practice of selling the same good but to different market at different price

43. Cartel: a situation where a group of producers agrees to restrict output through the imposition of quota in order to push up the price

44. Explicit/Overt collusion: a formal/ spoken/ verbal but secretive collusion among competing firms designed to control the market, raise the price and otherwise act like a monopoly

45. Implicit/Tacit collusion: an informal/unspoken / independent but parallel action among competing firms in an industry that leads to higher prices and profits

46. Price leadership: when the market leader sets the price of a product or service and other competing firms feel compelled to follow that price/ a form of tacit collusion

47. Game theory: the analysis of situations in which players are interdependent

48. Payoff matrix: outcomes of a game for the players given different possible strategies

49. Contestable market: a market where there is freedom of entry to the industry and where the costs of exit are low

50. Productive efficiency: when a firm is able to produce a good or service at lowest cost possible/ produce at MC = AC

51. X-inefficiency: happens when large firms do not have the incentive to lower down their production costs

52. Technical efficiency: a concept which is closely related to productive efficiency and x-inefficiency in which a firm is able to produce maximum output from the minimum quantity of inputs

53. Dynamic efficiency: the introduction of new technology and work practices to reduce costs over the time

54. Static efficiency: when a firm is productive efficient only at one point of time

55. Allocative/ social efficiency: when a firm is producing goods and services that are wanted by consumers/ able to produce a good or service at the level where MC = AR/

56. Resale price maintenance: the practice whereby a manufacturer and its distributors agree to sell the product at a fixed price/ price within certain range and if the latter refuse, the manufacturer may want to stop doing business with it

57. Horizontal merger: when two or more firms in the same industry and at the same stage of production process merge

58. Vertical merger: when two or more firms from the same industry but at different stage of production process merge

59. Forward vertical merger: a business strategy that involves the purchase of distributors to achieve economies of scale or higher market share

60. Backward vertical merger: a business strategy that involves the purchase of suppliers to reduce dependency and also to reduce costs

61. Conglomerate: when two or more firms from totally unrelated industries merge

62. Synergy: when two or more activities or firms put together can create greater outcome than the sum of the individual parts

63. Public private partnerships (PPP): collaboration between the public sector and the private sector companies to deliver services such as PFI

64. Private finance initiative: where private firms are contracted to develop expensive infrastructure on behalf of the government and upon completion the state will enter into a leasing agreement with private contractors

65. Competitive tendering: when firms bid for a right to run a service or gain a contract

66. Office of Fair Trading/ Competition Commission/ European Commission: organisation that is set up to maintain a healthy level of competition within an industry and also to protect public interest

67. RPI-X: a price capping formula where RPI is an inflation measurement while X is the expected fall in costs due to gain in efficiency

68. RPI+K: a price capping formula where RPI is an inflation measurement while K is capital investment requirements

69. Profit capping: a method of regulation where profit of a firm is capped based on a certain percentage of the value of its asset

70. Performance targeting: a method of regulation where firms that are being regulated will have to meet the targets such as reducing complaints and cutting duration of queues within certain time frame and if they fail to do so maybe subjected to certain amount of fines

71. Marginal profit: the additional profit due to extra one unit of output sold

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