Economics 1.5
Assumptions of monopolistic competition.
1. A large number of firms. 2. Slightly differentiated products. 3. Absence of barriers to entry and exit. 4. Firms are small, relative to the size of the industry. Means that the actions of one firm are unlikely to have a great effect on any of its competitors.
Assumptions of perfect competition.
1. A large number of firms. 2. A homogeneous product. 3. Freedom of entry and exit. 4. Perfect information. 5. Each firm is small relative to size of industry so does not have an effect upon the output of the industry as a whole.
Assumptions of monopoly.
1. A single or dominant firm in the market. 2. No close substitutes. 3. Significant barriers to entry.
Assumptions of an oligopoly.
1. Dominance of the industry by a small number of firms. 2. The importance of interdependence. 3. Differentiated or homogeneous products. 4. High barriers to entry.
3 necessary conditions for price discrimination.
1. The producer must have some price-setting ability. 2. Consumers must have different price elasticities of demand for the product. 3. The producer must be able to separate consumers so that they are not able to buy the product and then sell it to another consumer.
Definition of the term corporate social responsibility.
A business includes the public interest in its decision making.
Definition of the term legal barriers.
A firm may have been given a legal right to be the only producer in an industry ie. the legal right to be a monopoly. e.g. patents
Definition of the term anti-competitive behaviour.
A monopolist may also attempt to stop competition by adopting restrictive practices which may be legal or illegal.
Definition of the term economies of scale.
Any decreases in long-run average costs that come about when a firm alters all of its factors of production in order to increase its scale of output.
Definition of the term diseconomies of scale.
Any increase in long-run average costs that come about when a firm alters all of its factos of production in order to increase its scale of output.
Definition of the term non-price competition (oligopoly).
As firms in an oligopoly tend not to compete in terms of price they use different types of non-price competition such as brand names, packaging, special features, sponsorship deals, and special distribution features such as free delivery.
Definition of the term average costs.
Costs per unit of output.
Definition of short run with reference to fixed costs.
Do not change with output, firms must pay these even if they shut down
Barriers to entry.
Economies of scale Natural monopoly Legal barriers Brand loyalty Anti-competitive behaviour
Definition of the term law of diminishing returns.
Eventually diminishing marginal returns: as extra units of the variable factor are added to a given quantity of a fixed factor, the output from each additional unit of the variable factor will eventually diminish. Eventually diminishing average returns: as extra units of a variable factor are added to a given quantity of a fixed factor the output per unit of the variable factor will eventually diminish.
Definition of the term price discrimination.
Exists when a producer sells the exact same product to different consumers at different prices.
Definition of the term implicit costs.
Firm has factors that it already owns then they will not pay out money when they use them however there is still an opportunity cost involved. Implicit costs are earnings that a firm could have had if it had employed its factors in another use or if it had hired out or sold them to another firm.
Three degrees of price discrimination.
First degree: when each consumer pays exactly the price that he/she is prepared to pay. Second degree: when a firm charges different prices to consumers depending upon how much they purchase. Third degree: when consumers are identified in different market segment that recognizes the different price elasticities in each segment.
Definition of the term average fixed costs.
Fixed cost per unit of output. Because TFC is constant, AFC always fall as output increases.
Definition of the term natural monopoly.
If there are only enough economies of scale available in the market to support one firm.
Definition of the term marginal cost.
Is the increase in total cost of producing an extra unit of output.
Definition of the term brand loyalty.
May be that a monopolist produces a product that has gained huge brand loyalty.
Definition of the term loss.
Negative economic profit arising when total revenue is less than total cost.
Definition of the term decreasing returns to scale.
Occur when the % change in output < % change in inputs
Definition of the term constant returns to scale.
Occur when the % change in output = % change in inputs
Definition of the term increasing returns to scale.
Occur when the % change in output > % change in inputs.
Definition of the term long run in the context of production.
Period of time in which all factors of production are variable but the state of technology is fixed. All planning takes place in the long run.
Definition of the term short run in the context of production.
Period of time in which at least one factor of production is fixed. All production takes place in the short run.
Factors giving rise to diseconomies of scale.
Problems of coordination and communication. Alienation and loss of identity.
Definition of the term economic profit/supernormal profit/abnormal profit.
Profit over and above normal profit, and that the firm earns normal profit when economic profit is zero.
Alternative goals of firms.
Revenue maximization Growth maximization Satisficing Corporate social responsibility.
Factors giving rise to economies of scale.
Specialization Division of labour Bulk buying Financial economies Transport economies Large machines Promotional economies
Definition of the term normal profit.
The amount of revenue needed to cover the costs of employing self-owned resources (implicit costs, including entrepreneurship) or the amount of revenue needed to just keep the firm in business.
Definition of the term total costs.
The complete costs of producing output.
Definition of the term marginal product.
The extra output that is produced by using an extra unit of the variable factor.
Definition of the term marginal revenue.
The extra revenue that a firm gains when it sells one more unit of a product in a given time period.
Definition of the term economic costs.
The opportunity cost of all resources employed by the firm (including entrepreneurship).
Definition of the term explicit costs.
The opportunity cost of factors of production not owned by the firm is the price that is paid for them and the alternative things that could have been bought. Explicit costs are any costs to a firm that involve the direct payment of money.
Definition of the term average product.
The output that is produced on average by each unit of the variable factor.
Definition of the term average revenue.
The revenue that a firm receives per unit of its sales.
Definition of the term total product.
The total output that a firm produces using its fixed and variable factors in a given time period.
Producers are able to separate markets by...
Time Age Gender Income Geographical distance Types of consumer
Definition of the term total revenue.
Total amount of money that a firm receives from selling a certain amount of a good or service in a given time period.
Definition of the term total cost.
Total cost of all the fixed and variable factors used to produce a certain output. Equal to TFC plus TVC.
Definition of the term total fixed cost.
Total cost of the fixed assets that a firm uses in a given time period. It is the same whether firm produces one unit or one hundred units.
Definition of the term total variable cost.
Total cost of the variable assets that a firm use in a given time period. TVC increases are the firm uses more of its variable factor.
Definition of the term average total cost.
Total cost per unit of output. Equal to AFC plus AVC. Tends to fall as output increases.
Short run costs.
Total costs: total fixed cost, total variable cost and total cost. Average costs: average fixed cost, average variable cost, average total cost and marginal cost. Marginal cost.
Definition of the term average variable cost.
Variable cost per unit of output. Tends to tall as output increases.
Definition short run with reference to variable costs.
Variable costs vary directly with output - when output is zero, variable costs will be zero but as production increases, total variable costs will rise.
Definition of the term barriers to entry.
Ways of preventing entry to an industry.
Definition of the term profit maximization.
When a firm produces the level of output where marginal cost cuts marginal revenue from below. Meaning marginal revenue equals marginal cost.
Definition of the term satisficing
Where an economic agent aims to perform satisfactorily rather than to maximum level in order to perform other goals.
Long-run cost curves are U-shaped because...
of the existence of economies and diseconomies of scale.
Short-run cost curves are U-shaped because...
of the hypothesis of diminishing returns. Existence of eventually diminishing average returns explains the shape of the short-run average variable cost curve and the existence of eventually diminishing marginal returns explains the shape of the short-run marginal cost curve.
