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/ (?TC/ ?Q)
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 (?TR/ ?Q)
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
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