IB Economics (HL only) – Unit Three – Theory of the Firm – Vocabulary – Flashcards
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Accounting costs (explicit costs)
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the costs of the resources (land, labour, capital, enterprise) used to produce a good or service.
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Allocative efficiency (HL)
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the level of output where marginal cost is equal to average revenue or price. The firm sells the last unit it produces at the amount that it cost it to make it.
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Average cost (HL)
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the average (total) cost of production per unit. It is calculated by dividing the total cost by output (TC/Q)
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Average fixed cost (HL)
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total fixed costs (that do not vary with output) divided by the output (FC/Q)
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Average product (HL)
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the output that is produced, on average, by each unit of the variable factor. (AP = TP/V)
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Average revenue (HL)
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total revenue received divided by the number of units sold (TR/Q). Usually, price is equal to average revenue (P=AR)
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Average variable cost (HL)
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a firm's variable costs (labor, electricity, etc.) divided by the quantity (Q) of output produced (AVC=VC/Q)
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Barriers to entry (HL)
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obstacles that may prevent potential newcomers from entering a market
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Break-even price (HL)
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the price where average revenue is equal to average total costs (AR=TC); below this price, the firm will shut down in the long run
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Bundling (HL)
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the practice of joining related products together for the purpose of selling them as a single unit; sometimes used by monopolies to extend their power into new markets
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Cartel (HL)
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a formal agreement among firms on prices, output, or some other factor
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Collusive oligopoly (HL)
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where a few firms in an oligopoly agree to fix prices or output to avoid competition; together firms act like a monopoly
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Concentration ratio (HL)
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a ratio that indicates the relative size of firms in relation to their industry as a whole; low concentration ratio indicates greater competition
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Constant returns to scale (HL)
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where a given percentage increase in the quantity of all factors of production results in an equal percentage change in output and thus no change in long run average costs
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Contestable market (HL)
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a market in which there are only a few firms that behave in a competitive manner, because of the threat of new entrants
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Decreasing returns to scale (HL)
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where a given percentage increase in the quantity of all factors of production results in a smaller percentage increase in output and thus an increase in long run average costs (diseconomies of scale)
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Diseconomies of scale (HL)
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any increase in long-run average costs that resulting from a firm increasing its output
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Division of labour (HL)
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specialisation of people who perform specific tasks and roles; can result in increased productive efficiency
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Economic costs (HL)
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the total opportunity costs of production to a firm
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Economic profit (HL)
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when a firm's revenue is greater than the total costs of production, including opportunity costs
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Economies of scale (HL)
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any fall in long-run average costs that come about as a result of a firm increasing its output
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Explicit costs (accounting costs) (HL)
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the costs of the resources (land, labour, capital, enterprise) used to produce a good or service.
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Fixed costs (HL)
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costs of production that do not change with the level of output
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Fixed factor of production (HL)
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a resource (input) that does not vary with the level of output
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Game theory (HL)
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a method of analyzing the way that the actors in an interdependent relationship (such as oligopoly) make decisions by taking into account possible reactions of competitors
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Growth maximization (HL)
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the goal of maximizing output by a firm; a possible alternative goal to profit maximization
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Homogeneous products (HL)
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goods that have the same characteristics and are not able to be distinguished by consumers (wheat)
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Implicit costs (opportunity costs)(HL)
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costs that cannot be easily accounted, such as opportunity costs
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Increasing returns to scale (HL)
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a given percentage increase in the quantity of all factors of production results in a greater percentage increase in output and thus a fall in long run average costs (economies of scale)
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Interdependence (HL)
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a situation where the decisions of one firm in a market will have an impact on other firms; firms have to consider possible reactions of others when making decisions
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Kinked-demand curve (HL)
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a graph showing the interdependence of firms in a non-collusive oligopoly; shows the risks for a firm of raising or lowering the price of its product and explains the price-rigidity often seen in oligopolies
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Law of diminishing marginal returns (HL)
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as extra units of variable factor are applied to a fixed factor, the output from each additional unit of the variable factor will eventually decline
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Long run (HL)
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the period of time in which all factors of production are variable
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Long run average cost curve (HL)
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a graph showing long run average costs; the LRAC is U-shaped due to economies and diseconomies of scale
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Marginal cost (HL)
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the cost of producing one more unit of output
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Marginal product (HL)
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the extra output that is produced by using an extra unit of a variable factor. (MP = △TP/△V)
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Marginal revenue (HL)
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the extra revenue gained from selling one more unit of a good or service
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Monopolistic competition (HL)
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a market structure where there are many buyers and sellers producing differentiated products with no barriers to entry or exit; abnormal profits may be possible in the short run, but not in long run
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Monopoly (HL)
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a market form where there is only one dominant firm in the industry
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Nationalization (HL)
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the government takes control or ownership of a private firm or industry
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Natural monopoly (HL)
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a situation where there are only enough economies of scale available in a market to support one firm, so that it is natural that the industry be dominated by one firm only.
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Non-collusive oligopoly (HL)
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where firms in an oligopoly do not make agreements to fix prices or output, but instead engage in non-price competition; prices tend to be stable. The situation is represented by kinked demand curve diagram
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Non-price competition (HL)
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when a firm uses characteristics other than price to encourage consumers to buy a product
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Normal profit (zero economic profit) (HL)
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the amount of revenue needed to cover the total costs of production, including opportunity costs
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Oligopoly (HL)
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is a market structure where there is a small number of large firms that dominate the market (oil companies)
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Patent (HL)
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the exclusive right, granted by a government to an inventor, to manufacture, use, or sell an invention for a certain number of years
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Perfect competition (HL)
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a market structure where there is a very large number of small firms producing homogeneous products; firms are price takers, there are no barriers to entry or exit and all firms have perfect knowledge; abnormal profits may be possible in the short-run, but not in long run.
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Perfect information (HL)
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a situation where all parties in a transaction have all information; an assumption of many economic models in classical economics
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Predatory pricing (HL)
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the pricing of goods or services at such a low level that other suppliers cannot compete and are forced to leave the market; prices are often raised after that point
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Price discrimination (HL)
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occurs when a producer charges a different price to different consumers for an identical good or service
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Price fixing (HL)
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where firms collude to set a high price for a good or service
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Price leadership (HL)
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When a firm that is the leader in its sector determines the price of goods or services
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Price-maker (HL)
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a firm with enough power in a market to determine a product's price (monopoly)
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Price rigidity (HL)
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a situation in a market where the price remains stable (non-collusive oligopoly)
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Price-taker (HL)
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a firm with little or no power in a market to determine price (perfect competition)
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Price war (HL)
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a situation where two or more firms lower the price of their products or services in an attempt to sell more and win consumers from rivals; the risk is lower revenues if consumers do not switch firms
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Product differentiation (HL)
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a strategy for increasing sales of a product, where a firm distinguishes its physical characteristics from competitors
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Productive efficiency (HL)
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exists when the production is achieved at the lowest cost per unit of output; achieved at the point where average total costs are at their lowest value
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Profit maximization (HL)
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where marginal cost is equal to marginal revenue (MC=MR); the difference between total revenue and total cost is at the maximum; usually assumed to be the primary goal of firms
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Profit-maximizing level of output (HL)
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the level of output where marginal revenue is equal to marginal cost (MC=MR)
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Revenue maximization (HL)
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when marginal revenue is equal to zero (MR=0); an alternative goal of firms (as opposed to profit maximization)
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Satisficing (HL)
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a mix of the words satisfy and suffice. A situation where entrepreneurs try to cover opportunity costs, but do not push themselves further to maximize profits. An alternative goal of firms.
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Short run (HL)
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the period of time in which at least one factor of production is fixed
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Short run average cost curve (HL)
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a graphical representation of short run average costs; the SRAC is U-shaped due to the law of diminishing marginal returns
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Shut-down price (HL)
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is the price where average revenue is equal to average variable cost. Below this price, the firm will shut down in the short run
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Specialization (HL)
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where a resource such as labour is focused on a specific task, increasing efficiency of production
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Supernormal profit (economic or abnormal profit)(HL)
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when a firm's revenue is greater than the total costs of production, including opportunity costs
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Tacit collusion (HL)
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where firms agree upon a certain price or output strategy without putting it in writing or spelling out the strategy explicitly
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Total costs (HL)
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the total costs of producing a certain level of output; fixed costs plus variable costs (FC + VC)
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Total fixed costs (HL)
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total costs of factors of production that do not vary with output levels
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Total product (HL)
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the total output of a firm at a given level of inputs
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Total revenue (HL)
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the total revenue gained by a firm from the sale of a particular quantity of output; price times quantity sold (P x Q)
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Total variable costs (HL)
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total costs of inputs that vary with output
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Variable costs (HL)
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costs of production that vary with the level of output
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Variable factor of production (HL)
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a resource whose quantity changes with the level of output
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Zero economic profit (HL)
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a situation where the revenue earned just covers the total costs of production, including opportunity costs
