THEORY OF THE FIRM
1. Abnormal/ supernormal profit: A
profit that exceeds the minimum amount needed by a firm to be able to continue production
2. Average costs (AC): Total costs involved
for every one unit of output
3. Average fixed costs (AFC): Total fixed
costs for every one unit of output
4. Average variable costs (AVC): Total
variable costs for every one unit of output
5. Average revenue (AR): Total revenue for
every one unit of output
6. Barriers to entry: Obstacles that
prevent new competitors from entering into an industry or area of business
7. Barriers to exit: Obstacles in the
path of a firm which wants to leave an industry or area of business
8. Backward vertical integration: It is
when a firm buys over another company which is at the earlier chain of
production process
9. Contestable market: A market
structure which typically has low barriers to entry and exit
10. Concentration ratio: It is the
combined market share of the top three to five firms within an industry
11. Constant returns to scale: It occurs
when the percentage of increase in input is equivalent to the percentage of
increase in output
12. Conglomerate integration: It is when
two or more firms from totally different industries merge
13. Decreasing returns to scale: It
occurs when the percentage of increase in input is greater than the percentage
of increase in output
14. Diseconomies of scale: An increase
in long run average costs (LRAC) associated with rise in output
15. Economies of scale: It refers to the
fall in long run average costs (LRAC) associated with the rise in output
16. External diseconomies of scale: An
increase in long run average costs (LRAC) due to the expansion of the whole
industry
17. External economies of scale: A fall
in long run average costs (LRAC) due to the expansion of the whole industry
18. Financial economies of scale: Fall
in the long run average costs (LRAC) when a big firm borrows money in a large
sum which then allows them to negotiate with the bank manager for lower
interest rate
19. Fixed costs (FC): Costs that do not vary
with the level of output
20. Forward vertical integration: It is
when a firm buys over another firm which is at the later chain of production
process
21. Homogenous goods: Goods that compete
with one another but they are perfect substitutes
22. Horizontal integration: It is when
two or more firms in the same industry and at the same stage of production process
merge
23. Increasing returns to scale: It is
when the percentage of increase in output is greater than the percentage of
increase in input
24. Internal diseconomies of scale: Rise
in the long run average costs (LRAC) due to factors from within an organisation
25. Internal economies of scale: Fall in
the long run average costs (LRAC) due to factors from within an organisation
26. Limit pricing: It is when a firm
sets the price that is low enough to deter entrants
27. Marginal costs (MC): It is the additional
total costs due to extra one unit of output produced
28. Marketing economies of scale: A fall in the long run average costs (LRAC) because marketing and advertising expenditures are spread over large volume of output
29. Marginal revenue (MR): It is the
additional total revenue due to extra one unit of output sold
30. Market share: Percentage of total sales that is earned by a particular firm over a period of time
31. Marginal profit: It is the
additional profit due to extra one unit of output sold
32. Managerial economies of scale: Fall
in the long run average costs (LRAC) when a big firm is capable of hiring
specialist managers/ workers which will increase productivity in each division/
department
33. Monopolistic: An industry that has
many firms (not as many as in perfect market) which produe slightly
differentiated products and hence command the ability to set own prices
34. Monopoly: An industry that is
technically dominated by one large firm/ A firm that controls more than 25% of
the market share (modern definition)
35. Monopsony: A market condition where
there is only one large dominant buyer
36. Normal profit: A minimum amount of
money needed for a firm to be able to continue operating
37. Oligopoly: An industry that is
dominated by few large firms that are highly interdependent
38. Perfect competition: An industry
which consists large number of firms which sell identical products and
therefore have no influence over the price
39. Predatory pricing: It is when a
firms sells a good or a service at a loss making price usually with the intention
to drive out existing competitors
40. Principle of dimension/
containerisation: A fall in the long run average costs (LRAC) when a firm
decides to use larger storage space because capacity will always increase at a
rate faster than the costs
41. Price discrimination: It is the
practice of selling the same output but to different market at different price
with no relation to costs
42. Product differentiation: The
process of distinguishing a product or service from others to make it more
attractive to a particular target market
43. Profit maximisation: It is when a
firm operates at the level of output where marginal cost (MC) equates to
marginal revenue (MR)
44. Profit satisficing: It is where the
business managers deliver a minimum amount of profits to keep the shareholders
happy and at the same time trying to maximise other goals
45. Purchasing economies of scale: A
fall in the long run average costs (LRAC) because a firm buys in bulk and hence
is able to negotiate for much better discounts
46. Revenue maximisation: It is when a
firm chooses to operate at the level of output where marginal revenue (MR)
equals to zero
47. Risk bearing economies of scale: A
fall in business risk associated with diversification into wider range of
products
48. Variable costs (VC): Costs that vary with
the level of output
49. Sales maximisation: It is when a
firm chooses to operate at the level of output where average costs (AC) equals
to average revenue (AR)
50. Sunk costs: Costs that have been
incurred and cannot be recovered
51. Subnormal profits/ Losses: A profit
(negative value) that is below the minimum amount needed by a firm to be
capable of continuing operation
52. Technical economies of scale: It is
a fall in the long run average costs (LRAC) when big firms invest in new
technology or specialist equipment which allows to be more efficient than
before
53. Transport economies of scale: A fall
in the long run average costs (LRAC) when big firms set up their own logistic
department which is obviously cheaper than the service provided by a third
party
54. Total costs (TC): Sum of all fixed costs
(TFC) and all variable costs (TVC)
55. Total revenue: Sum of monetary
receipts from the sale of a good or service
56. Vertical integration: It is when two
or more firms from the same industry but at different stage of production
process merge
THEORY OF UTILITY
57. Budget line: A line that shows all
the maximum possible combination of two goods that a consumer would be able to
purchase with fixed prices and a given income
58. Income effect: The effect on
consumption due to a change in real income associated with a price change
59. Law of diminishing marginal utility:
A principle which states that, as the quantity of a good consumed increases,
each successive unit will provide lower utility than before
60. Law of equi-marginal principal/
utility maximisation/ Gossen’s Second Law: A principle which states total
utility will be maximised when the marginal utility per dollar for each good
becomes the same
61. Marginal utility: Additional total
utility due to the consumption of extra one unit of output
62. Paradox of value: An economic theory
which states the fact that some items are essential for survival but they carry
much lesser value than non-essential ones such as the case of water and diamond
63. Price effect: It is the change in quantity
demanded in response to a change in price of a product holding other factors
constant
64. Substitution effect: The effect on
consumption due to a change in price holding income constant
65. Total utility: Total amount of
satisfaction obtained from the consumption of a number of units of a product
66. Utility: An economic term for satisfaction
and the unit of measurement is util
THEORY OF PRODUCTION
67. Average physical product of labour
(APPL): Total output for each worker
68. Marginal physical product of labour
(MPPL): Additional output produced due to extra one worker hired
69. Total physical product of labour (TPPL):
Total output produced for a given number of workers
70. Law of diminishing marginal
return/variable proportions: A principle which states that, as additional
workers are added to a fixed factor, the increment in output by each worker
will eventually diminish
71. Long run: A time period in which all
factors are variable
72. Short run: A time period in which at
least one input is fixed
THEORY OF WAGES
73. Average cost of labour (ACL): Total cost
incurred for every one unit of worker hired
74. Backward bending labour supply curve:
A labour supply curve that is initially positively-sloped and then become
negatively-sloped as real wage continues to increase
75. Closed shop: A binding agreement which
states that the only way for an employer to recruit new workers is through a
particular union
76. Collective bargaining: Negotiations
between an employer and a group of employees aimed at reaching a consensus
regarding the working conditions
77. Derived demand: It is when a factor
of production or an input is demanded because there is a demand for the final
product in which it will make
78. Economic rent: Payment to labour in
excess of their transfer earnings
79. Income effect: A condition in the
labour market where higher real wage makes leisure more attractive than working
and so hours of work will decrease
80. Imperfect labour market: A theory
which supports the view that labour market in the real world is unlikely to be
perfectly competitive due to reasons like monopsony power of employers,
influence of labour union, government intervention and market failure itself
81. Marginal cost of labour (MCL): Additional
total cost incurred due to extra one unit of worker hired
82. Marginal revenue product of labour (MRPL):
Additional total revenue due to extra one unit of worker hired
83. Monopsony: A market condition where
there is only buyer but many sellers
84. Minimum wage: The lowest pay that
must be paid by an employer below which it cannot fall
85. Non-pecuniary advantages: Non-monetary
benefits from an employment such as job security, chance to live and work in
overseas, subsidised healthcare, in-house training and less stressful
86. Pecuniary advantages: Benefits that
can be evaluated in monetary terms
87. Perfectly competitive labour market:
A labour market theory which makes extreme assumptions such as large number of
hirers and potential workers, both sides of the market being wage takers,
labours being homogenous and the existence of perfect information
88. Substitution effect: A condition in
the labour market where higher real wage makes working more attractive than
leisure and so hours of work will increase
89. Trade union: A group of employees
who come together to pursue common interest
90. Transfer earnings: The minimum
payment required to keep a factor of production in its current use
91. Wage: Reward for the factor of
production labour
92. Wage drift: A situation where the
average level of wages in an industry tends to rise faster than the supposed
wage rates
93. Wealth: Assets such as property,
share, business and intellectual property
94. Income: Streams of monetary receipts such as rental, dividend, profit and royalty payment
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