Friday, October 17, 2014

List of the Most Important Definitions For Chapter 2 (A2): The Price System and the Theory of the Firm



THEORY OF THE FIRM
1. Abnormal/ supernormal profit: A profit that exceeds the minimum amount needed by a firm to be able to continue production

2. Average costs (AC): Total costs involved for every one unit of output

3. Average fixed costs (AFC): Total fixed costs for every one unit of output

4. Average variable costs (AVC): Total variable costs for every one unit of output

5. Average revenue (AR): Total revenue for every one unit of output

6. Barriers to entry: Obstacles that prevent new competitors from entering into an industry or area of business

7. Barriers to exit: Obstacles in the path of a firm which wants to leave an industry or area of business

8. Backward vertical integration: It is when a firm buys over another company which is at the earlier chain of production process

9. Contestable market: A market structure which typically has low barriers to entry and exit

10. Concentration ratio: It is the combined market share of the top three to five firms within an industry

11. Constant returns to scale: It occurs when the percentage of increase in input is equivalent to the percentage of increase in output

12. Conglomerate integration: It is when two or more firms from totally different industries merge

13. Decreasing returns to scale: It occurs when the percentage of increase in input is greater than the percentage of increase in output

14. Diseconomies of scale: An increase in long run average costs (LRAC) associated with rise in output

15. Economies of scale: It refers to the fall in long run average costs (LRAC) associated with the rise in output

16. External diseconomies of scale: An increase in long run average costs (LRAC) due to the expansion of the whole industry

17. External economies of scale: A fall in long run average costs (LRAC) due to the expansion of the whole industry

18. Financial economies of scale: Fall in the long run average costs (LRAC) when a big firm borrows money in a large sum which then allows them to negotiate with the bank manager for lower interest rate

19. Fixed costs (FC): Costs that do not vary with the level of output

20. Forward vertical integration: It is when a firm buys over another firm which is at the later chain of production process

21. Homogenous goods: Goods that compete with one another but they are perfect substitutes

22. Horizontal integration: It is when two or more firms in the same industry and at the same stage of production process merge

23. Increasing returns to scale: It is when the percentage of increase in output is greater than the percentage of increase in input

24. Internal diseconomies of scale: Rise in the long run average costs (LRAC) due to factors from within an organisation

25. Internal economies of scale: Fall in the long run average costs (LRAC) due to factors from within an organisation

26. Limit pricing: It is when a firm sets the price that is low enough to deter entrants

27. Marginal costs (MC): It is the additional total costs due to extra one unit of output produced

28. Marketing economies of scale: A fall in the long run average costs (LRAC) because marketing and advertising expenditures are spread over large volume of output

29. Marginal revenue (MR): It is the additional total revenue due to extra one unit of output sold

30. Market share: Percentage of total sales that is earned by a particular firm over a period of time

31. Marginal profit: It is the additional profit due to extra one unit of output sold

32. Managerial economies of scale: Fall in the long run average costs (LRAC) when a big firm is capable of hiring specialist managers/ workers which will increase productivity in each division/ department

33. Monopolistic: An industry that has many firms (not as many as in perfect market) which produe slightly differentiated products and hence command the ability to set own prices

34. Monopoly: An industry that is technically dominated by one large firm/ A firm that controls more than 25% of the market share (modern definition)

35. Monopsony: A market condition where there is only one large dominant buyer

36. Normal profit: A minimum amount of money needed for a firm to be able to continue operating

37. Oligopoly: An industry that is dominated by few large firms that are highly interdependent

38. Perfect competition: An industry which consists large number of firms which sell identical products and therefore have no influence over the price

39. Predatory pricing: It is when a firms sells a good or a service at a loss making price usually with the intention to drive out existing competitors

40. Principle of dimension/ containerisation: A fall in the long run average costs (LRAC) when a firm decides to use larger storage space because capacity will always increase at a rate faster than the costs

41. Price discrimination: It is the practice of selling the same output but to different market at different price with no relation to costs

42. Product differentiation: The process of distinguishing a product or service from others to make it more attractive to a particular target market

43. Profit maximisation: It is when a firm operates at the level of output where marginal cost (MC) equates to marginal revenue (MR)

44. Profit satisficing: It is where the business managers deliver a minimum amount of profits to keep the shareholders happy and at the same time trying to maximise other goals

45. Purchasing economies of scale: A fall in the long run average costs (LRAC) because a firm buys in bulk and hence is able to negotiate for much better discounts

46. Revenue maximisation: It is when a firm chooses to operate at the level of output where marginal revenue (MR) equals to zero

47. Risk bearing economies of scale: A fall in business risk associated with diversification into wider range of products

48. Variable costs (VC): Costs that vary with the level of output

49. Sales maximisation: It is when a firm chooses to operate at the level of output where average costs (AC) equals to average revenue (AR)

50. Sunk costs: Costs that have been incurred and cannot be recovered

51. Subnormal profits/ Losses: A profit (negative value) that is below the minimum amount needed by a firm to be capable of continuing operation

52. Technical economies of scale: It is a fall in the long run average costs (LRAC) when big firms invest in new technology or specialist equipment which allows to be more efficient than before

53. Transport economies of scale: A fall in the long run average costs (LRAC) when big firms set up their own logistic department which is obviously cheaper than the service provided by a third party

54. Total costs (TC): Sum of all fixed costs (TFC) and all variable costs (TVC)

55. Total revenue: Sum of monetary receipts from the sale of a good or service

56. Vertical integration: It is when two or more firms from the same industry but at different stage of production process merge

THEORY OF UTILITY
57. Budget line: A line that shows all the maximum possible combination of two goods that a consumer would be able to purchase with fixed prices and a given income

58. Income effect: The effect on consumption due to a change in real income associated with a price change

59. Law of diminishing marginal utility: A principle which states that, as the quantity of a good consumed increases, each successive unit will provide lower utility than before

60. Law of equi-marginal principal/ utility maximisation/ Gossen’s Second Law: A principle which states total utility will be maximised when the marginal utility per dollar for each good becomes the same

61. Marginal utility: Additional total utility due to the consumption of extra one unit of output

62. Paradox of value: An economic theory which states the fact that some items are essential for survival but they carry much lesser value than non-essential ones such as the case of water and diamond

63. Price effect: It is the change in quantity demanded in response to a change in price of a product holding other factors constant

64. Substitution effect: The effect on consumption due to a change in price holding income constant

65. Total utility: Total amount of satisfaction obtained from the consumption of a number of units of a product

66. Utility: An economic term for satisfaction and the unit of measurement is util

THEORY OF PRODUCTION
67. Average physical product of labour (APPL): Total output for each worker

68. Marginal physical product of labour (MPPL): Additional output produced due to extra one worker hired

69. Total physical product of labour (TPPL): Total output produced for a given number of workers

70. Law of diminishing marginal return/variable proportions: A principle which states that, as additional workers are added to a fixed factor, the increment in output by each worker will eventually diminish

71. Long run: A time period in which all factors are variable

72. Short run: A time period in which at least one input is fixed

THEORY OF WAGES
73. Average cost of labour (ACL): Total cost incurred for every one unit of worker hired

74. Backward bending labour supply curve: A labour supply curve that is initially positively-sloped and then become negatively-sloped as real wage continues to increase

75. Closed shop: A binding agreement which states that the only way for an employer to recruit new workers is through a particular union

76. Collective bargaining: Negotiations between an employer and a group of employees aimed at reaching a consensus regarding the working conditions

77. Derived demand: It is when a factor of production or an input is demanded because there is a demand for the final product in which it will make

78. Economic rent: Payment to labour in excess of their transfer earnings

79. Income effect: A condition in the labour market where higher real wage makes leisure more attractive than working and so hours of work will decrease

80. Imperfect labour market: A theory which supports the view that labour market in the real world is unlikely to be perfectly competitive due to reasons like monopsony power of employers, influence of labour union, government intervention and market failure itself

81. Marginal cost of labour (MCL): Additional total cost incurred due to extra one unit of worker hired
 
82. Marginal revenue product of labour (MRPL): Additional total revenue due to extra one unit of worker hired

83. Monopsony: A market condition where there is only buyer but many sellers

84. Minimum wage: The lowest pay that must be paid by an employer below which it cannot fall

85. Non-pecuniary advantages: Non-monetary benefits from an employment such as job security, chance to live and work in overseas, subsidised healthcare, in-house training and less stressful

86. Pecuniary advantages: Benefits that can be evaluated in monetary terms

87. Perfectly competitive labour market: A labour market theory which makes extreme assumptions such as large number of hirers and potential workers, both sides of the market being wage takers, labours being homogenous and the existence of perfect information

88. Substitution effect: A condition in the labour market where higher real wage makes working more attractive than leisure and so hours of work will increase

89. Trade union: A group of employees who come together to pursue common interest

90. Transfer earnings: The minimum payment required to keep a factor of production in its current use

91. Wage: Reward for the factor of production labour

92. Wage drift: A situation where the average level of wages in an industry tends to rise faster than the supposed wage rates

93. Wealth: Assets such as property, share, business and intellectual property
 
94. Income: Streams of monetary receipts such as rental, dividend, profit and royalty payment

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