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UNIT 6 Economics Theory of the Firm And Market Structures
Word Definition Example
1 Alienation and loss of identity This is the psychological effect of being a big businesses. Essentially workers lose a sense of pride in what they make because there is a weaker product identity, the workers feel alienated, like there is no point and the CEO is not even connected with the workers GE, General Electrics, nowadays creates a wide spectrum of goods, from jet engines to lightbulbs
GE, General Electrics, nowadays creates a wide spectrum of goods, from jet engines to lightbulbs
2 Allocatively efficient Allocative efficiency is a state of the economy in which production represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing.
3 Anticooperative behaviour
4 Average costs (AC) average cost and/or unit cost is equal to total costdivided by the number of goods produced (the output quantity, Q) AC=TC/Q
5 Average fixed cost (AFC) The fixed cost of production (FC) divided by the quantity of output produced. AFC = FC/Q
6 Average revenue (AR) AKA average revenue per unit A measure used primarily by consumer communications and networking companies, defined as the total revenue divided by the number of subscribers. AR = TR/# of subscribers
7 Average total cost (ATC) Total cost divided by the number of goods produced (the output quantity Q). It is also equal to the sum of average variable costs (total variable costs divided by Q) plus average fixed costs(total fixed costs divided by Q) ATC = TC/Q or AVC+AFC
8 Average variable cost (AVC) A firm’s variable costs (labor, electricity, etc.) divided by the quantity of output produced. Variable costs are those costs which vary with output. AVC = VC/Q
9 Average product Shiv Average product, which occasionally goes by the alias average physical product (APP), is one of two measures derived from total product. The other is marginal product. Average product is the per unit production of a firm.
10 Brand loyalty Shiv Brand loyalty is when consumers become committed to your brand and make repeat purchases over time. Brand loyalty is a result of consumer behavior and is affected by a person's preferences. Loyal customers will consistently purchase products from their preferred brands, regardless of convenience or price.
11 Breakeven price Shiv Break even pricing is the practice of setting a price point at which a business will earn zero profits on a sale. The intention is to use low prices as a tool to gain market share and drive competitors from the marketplace.
12 Bulk buying Shiv Bulk buying is the purchase of much larger quantities than the usual, for a unit price that is lower than the usual. The wholesaler will accept a slightly lower sales price for each unit, if the retailer
will agree to purchase a much greater quantity of units, so the wholesaler can maximize his profit.
13 Collusive oligopoly It refers to an agreement between firms to limit competition, increase monopoly power and increase profits. It is illegal in most countries, because it works to limit competition.
The dispute between the US competition authorities and Apple who have been accused of trying to force higher the prices of ebooks through collusion with the major book publishers.
14 Control and communication problems A larger firm size may lead to difficulties in communication between various component parts of the firm, again resulting in inefficiencies and higher average costs.
Difficulties to communicate the instructions between the new members of Apple.
15 Corporate social responsibility (CSR) The practice of some corporations to avoid socially undesirable activities.
Polluting activities, employing children, or employing workers under unhealthy conditions...
16 Cost Theory An economic concept that is getting something requires giving up something else. Economists use cost theory to provide a framework for understanding how individuals and firms allocate resources in such a way that keeps costs low and benefits high.
Earning more money may require working more hours, which costs more leisure time.
17 Diseconomies of scale Increases in the average costs of production that occur as a firm increases its output by varying all its inputs (i.e. in the long run). Diseconomies of scale are responsible for the upward sloping part of the longrun average total cost curve: as a firm increases its size, costs per unit of output increase.
LRATC: longrun average total cost curve
18 Division of labour Division of labour is an economic concept which states that dividing the production process into different stages enables workers to focus on specific tasks. If workers can concentrate on one small aspect of production, this increases overall efficiency – so long as there is sufficient volume and quantity produced.
Ford motor factories. In the 1920s, H.Ford made use of the assembly line to increase the productivity of producing motor cars. On the assembly line, there was division of labour with workers concentrating on particular jobs.
19 Economic cost The sacrifice involved in performing an activity, or following a decision or course of action. It may be expressed as the total of opportunity cost (cost of employing resources in one activity than the other) and accounting costs (the cash outlays). The accounting cost plus opportunity cost.
An example of economic cost would be the cost of attending college. Before making economic decisions, there are a series of components of economic costs that a firm will take into consideration.
20 Economies of scale Economies of scale is the cost advantage that arises with increased output of a product. Economies of scale arise because of the inverse relationship between the quantity produced and perunit fixed costs
21 Explicit costs A business expense that is easily identified and accounted for. Explicit costs represent clear, obvious cash outflows from a business that reduce its bottomline profitability. This contrasts with lesstangible expenses such as goodwill amortization, which are not as clear cut regarding their effects on a business's bottomline value.
The cost of materials that go into the production of goods.
22 Financial economies
23 Game theory Game theory is "the study of mathematical models of conflict and cooperation between intelligent rational decisionmakers." Game theory is mainly used in economics
24 Growth maximisation The firm may be willing to make low levels of profit in order to increase in size and gain more market share
25 Implicit costs In economics, an implicit cost, also called an imputed cost, implied cost, or notional cost, is the opportunity cost equal to what a firm must give up in order to use a factor of production for which it already owns and thus does not pay rent. It is the opposite of an explicit cost, which is borne directly.
An example is an opportunity cost. The next best alternative foregone when conducting an economic transaction.
26 Large machines Manufacturing using large machines that can last longer and perform more tasks
Using a large scale newspaper printer instead of a ordinary house printer
27 Law of diminishing returns is the decrease in the marginal (incremental) output of a production process as the amount of a single factor of production is incrementally increased, while the amounts of all other factors of production stay constant.
28 Legal barrier They are the legal barriers that have been set in place by governments through copyrights and patents. A barrier to entry are the existence of high startup costs or other obstacles that prevent new competitors from easily entering an industry or area of business.
Patents. This is a legal barrier
which prevents other firms using
that particular technology. It can
be an effective way to prevent
competition.
29 Long run A period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all costs.
30 Marginal Cost (MC) marginal cost is the change in the total cost that arises when the quantity produced is incremented by one unit, that is, it is the cost of producing one more unit of a good.
31 Marginal Revenue (MR) is the increase in revenue that results from the sale of one additional unit of output.
32 Marginal product The change in output resulting from employing one more unit of a particular input (for instance, the change in output when a firm's labor is increased from five to six units)
33 Monopolistic competition A type of imperfect competition such that many producers sell products that are differentiated from one another
Restaurants business Hotels and pubs General specialist retailing Consumer services
34 Natural monopoly A monopoly that exists because the cost of producing the product is lower due to economies of scale if there is just a single producer than if there are several competing producers
Tap water The main water grid system
35 Noncollusive oligopoly Oligopolies are markets which have the following features:
A few large firms Entry barriers Non price competition Product branding and
differentiation Interdependence in
decision making
36 Nonprice competition In oligopolies the majority of competition is nonprice. The aims to influence demand and build brand recognition
37 Oligopoly A state of limited competition, in which a market is shared by a small number of producers or sellers
Tennis balls: Wilson, Penn, Dunlop, Spalding Cars: GM, Ford Aircrafts: Boeing, Lockheed Martin, Airbus
38 Perfect competition The situation prevailing in a market in which buyers and sellers are so numerous and well informed that all elements of monopoly are absent and the market price of commodity is beyond the control of individual buyers and sellers.
39 Price discrimination First degree Seconddegree Thirddegree
40 Productive efficiency A situation in which the economy could not produce any more of one good without sacrificing production of another good.
41 Profit maximization The shortrun or longrun process by which a firm determines the price and output level that returns the greatest profit
42 Profit maximising level of output Profit maximizing quantity and price can be determined by selling marginal revenue equal to zero, which occurs at the maximal level of output. MC=MR
43 Promotional economies
44 Revenue maximisation Maximising sales revenue is an alternative to profit maximisation and occurs when the marginal revenue, MR, from selling an extra unit is zero.
45 Revenue theory Revenue is the income a firm retains from selling its products once it has paid indirect tax, such as VAT. Revenue provides the income which a firm needs to enable it to cover its costs of production, and from which it can derive a profit.
46 Satisficing Pursue a course of action that will satisfy the minimum requirements necessary to achieve a particular goal.
47 Short run It is the concept that within a certain period of time, in the future, at least one input is fixed while others are variable. The short run is not a definite period of time, but rather varies based on the length of the firm's contracts.
48 Shortrun abnormal profits Supernormal profit is defined as extra profit above that level of normal profit. Supernormal profit occurs where AR>ATC. Supernormal profit is also known as abnormal profit. Abnormal profit means there is an incentive for other firms to enter the industry (if they can)
49 Shortrun losses
50 Shutdown price Point of operations where a firm is indifferent between continuing operations and shutting down temporarily. The shutdown point is the combination of output and price where a firm earns just enough revenue to cover its total variable costs.
51 Specialization A method of production where a business or area focuses on the production of a limited scope of products or services in order to gain greater degrees of productive efficiency with the entire system
Doctor specialists Teachers specializing in different subjects
of businesses or areas.
52 Theory of Monopoly
53 Transport Economies The study of the movement of people and goods over space and time
54 Total Cost (TC) the total costs of producing a certain level of output fixed costs plus variable costs.
55 Total fixed cost (TFC) Costs that do not change with the level of output. They will be the same for one or one thousand units. (The cost of producing nothing.)
Rent + Electricity + Workers
56 Total product The output derived from a specific combination of outputs
Coca Cola has a total product of 15 million sodas per week in Tanzania
57 Total Revenue (TR) the aggregate revenue gained by a firm from the sale of a particular quantity of output (equal to price times quantity sold).
A MacBook is $1750. 5 MacBooks are sold. TR = 1750 x 5 = $8750
58 Total variable cost (TVC) The total costs that vary with the level of output.
Cost of potatoes for McDonalds
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