Super-normal fun with definitions for IAL

 Anything with an * means you should know where and how it relates to diagrams.  Anything with a & means you don’t really need the definition as such – just examples.

Costs

 Average costs*

 Fixed costs*

 Variable costs*

 Marginal Costs*

 Implicit costs

 Explicit costs

 Sunk costs

 The law of diminishing marginal returns* also known as diminishing marginal productivity.

 Economics of Scale*

 Internal economies of scale

 External economies of scale

 Diseconomies of scale*

 Synergies &

Vertical integration

 Backward vertical integration

 Forward vertical integration

 Horizontal integration

 Organic growth

 Demerger

 Short term

 Long term

 Shut down/leave market point in the short term*

 Shut down/leave market in the long term point*.

Revenue

 Average revenue*

 Marginal Revenue*

 Total Revenue*

 Normal profit*

 Supernormal profit*

 Perfect Competition*

 Imperfect competition/monopolistic competition*

 Oligopoly*

 Concentration ratio*

 Monopoly*

 Legal Monopoly

 Natural Monopoly

 Monopsony

 Profit maximisation*

 Revenue Maximisation*

 Sales Maximisation*

 Profit satisficing

 Product differentiation

 Interdependence

 Price maker

 Price taker

 Contestable markets

 Credible threat

 Barriers to entry

 Barriers to exit&

 Productive efficiency*

 Allocative Efficiency*

 Kinked demand curve*

 Collusion

 Formal (overt) collusion

 Tacit collusion

Pricing Strategies

 Limit Pricing

 Premium pricing

 Predatory Pricing

 Loss leader

 Penetration pricing

 Psychological pricing

 Price discrimination*

 First degree price discrimination

 Second degree price discrimination

 Third degree price discrimination*

 Office of Fair Trading and the Competition Commission – now the CMA – the Competition and Markets Austhority

 Competitive tendering

 International Competitiveness:

 Unit Labour Cost

 Transnational Corporation

 Transfer pricing

Costs

 Average costs*  Total costs divided by output.

 Fixed costs*  Costs that do not vary with output.

 Variable costs*  Costs which vary with output.

 Marginal Cost*  The cost of producing one extra unit of output.

 Implicit costs  an economic cost which a firm does not pay for with money to another firm but is the opportunity cost of factors of production which the firm itself owns.

 Explicit costs  Explicit costs represent clear, obvious cash outflows from a business that reduce its bottom-line profitability.

 Sunk costs  A cost that has already been incurred and no part of it can be recovered.

 The law of diminishing marginal returns  This states when you have a fixed factor, and you add a variable factor to that in the production process – the return will eventually begin to diminish.

 Economics of Scale  Cost benefits due to expansion.

 Diseconomies of scale  Rising average costs as a firm gets too big.

 Internal economies of scale  Costs benefits that an individual firm can enjoy as it expands.

 External economies of scale  The costs benefits that all firms in an industry can enjoy when the industry expands.

 Synergies&

Vertical integration

 Backward vertical integration  Merging with a firm which operates at an earlier stage of the production process – that is further away from the consumer

 Forward vertical integration  Merging with a firm which operates in a later stage of the production process – that is closer to the consumer.

 Horizontal integration  Horizontal merger is a type of merger between two firms in the same industry at the same stage of production.

 Organic growth  Organic growth is the process of business expansion by increased output, customer base expansion or by launching new products.

 Demerger  A single business is broken into separate components.

 Short term  When at least one factor of production is fixed.

 Long term  When all factors of production are variable.

 Shut down/leave market point in the short term*  A firm will implement a production shutdown if the revenue from the sale of goods produced cannot cover the variable costs of production.

 Shut down/leave market in the long term point*.  A firm will implement a production shutdown in the long run if the revenue from the sale of goods produced cannot cover the total costs of production.

Revenue

 Average revenue*  Total revenue divided by number of units sold.

 Marginal Revenue*  Revenue earned from selling one extra unit of output.

 Total Revenue*

 Normal profit*  Normal profit is the minimum level of profit needed so that a firm will remain in the market.

 Supernormal profit*  Abnormal (or supernormal or economic) profit – the profit over and above normal profit.

 Perfect Competition*  No need for definition – just know the conditions for perfect competition.

 Imperfect competition/monopolistic competition*  No need for definition – just know the conditions for perfect competition.

 Oligopoly*  A market structure dominated by a few large firms.

 Concentration ratio*  Know what it is and how to calculate it.

 Monopoly*  A market structure dominated by one large firm.

 Legal Monopoly  A situation whereby a firm controls 25% of more of the market share.

 Natural Monopoly  Natural monopolies occur when a single firm can serve the entire market at a lower cost than a combination of two or more firms.

 Monopsony  A monopsony exists where there is only one dominant buyer in a market.

 Profit maximisation*  Operate at point MC=MR

 Revenue Maximisation*  Operate at a point of MR = 0

 Sales Maximisation*  Selling as many units as possible without making a loss. Operate at AC=AR

 Profit satisficing  Making just enough profit to satisfy the owners of the business.

 Product differentiation  A marketing process that showcases the differences between products.

 Interdependence  One firm’s behaviour directly affects the behaviour and decisions of rival firms.

 Price maker  Have some control of price.

 Price taker  Have no control of price and must accept what the market offers.

 Contestable markets  Markets where there is freedom of entry and exit.

 Barriers to entry&  Obstacles preventing new firms from entering a market.

 Barriers to exit&  Costs associated with leaving a business.

 Productive efficiency*  When production is achieved at its lowest cost.  Produce at the lowest point on the AC curve.

 Allocative Efficiency*  Occurs when resources are distributed in such a way that no consumers could be better off without making others worse off.  Produce where P=MC

 Kinked demand curve*  Either an increase or a decrease in price will lead to a fall in total revenue

 Collusion  Collusion: collective agreements between producers to restrict competition.

 Formal collusion  Collective written or verbal agreements between producers to restrict competition. 

 Tacit collusion.  when firms collude without any formal agreement being reached or even without explicit communication between the firms.

Pricing Strategies

 Limit Pricing  Selling at below the profit maximisation price in order to dissuade new entrants from coming into the market.

 Premium pricing  Setting a high price in order to attract a small number of high income customers.

 Predatory Pricing  Selling at a loss in order to drive competitors out of the market and then raising price afterwards.

 Loss leader  Selling certain items at a loss in the hope that demand for their complements will compensate.

 Penetration pricing  Penetration pricing is a marketing technique in which a company offers a new product at a price significantly lower than its competitors.

 Price discrimination*&  Price discrimination occurs when different prices are charged to different consumers for the same product by the same provider.

 First degree price discrimination  The seller is able to get the maximum possible price from each customer. The seller takes all the consumer surplus.

 Second degree price discrimination  This is price discrimination based on quantity.  Bulk buying, season tickets holders, frequent flyers etc.

 Third degree price discrimination  This is when the seller separates consumers based on time, income, gender or age.

 Office of Fair Trading and the Competition Commission (NOW THE CMA)  Government body designed to protect the interest of consumers and emilinate anti- competitive practices.

 International Competitiveness:  is the ability of an economy to compete fairly and successfully in markets for internationally traded goods and services.

 Unit Labour Cost  These are the labour costs of supplying goods and services per unit of output – in simple terms, how expensive it is to make something of value.

 Competitive tendering  Introducing competition among private sector firms which put in bids for work which the public sector feel should be undertaken by private hands.

 Transnational Corporation  A transnational corporation (TNC or MNC) is a firm with significant operations in several different countries.

 Transfer pricing  Transfer pricing is the setting of the price for goods and services sold between parent and subsidiary companies.