Economics: Topic 3, Year 2 Definitions

This is a revision quiz for A-Level Economics, Topic 3, Year 2. This topic is on: Perfect competition, imperfectly competitive markets and monopoly.
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Last updated: September 16, 2020
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First submittedSeptember 16, 2020
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Definition
Answer
Describes the characteristics of the market that affect the ways in which firms compete and also the welfare of consumers within that market.
Market Structure
The addition to total revenue as a result of the sale of one more unit of output.
Marginal Revenue (MR)
The addition to total costs arising from making one more item.
Marginal Costs (MC)
The provision of finance to a firm in return for a share of profit. It involves undertaking financial risks.
Ownership
The actual management of a firm and the organisation of decision making within it.
Control
The separation of the two entrepreneurial functions, so that control is exerted by individuals who are not necessarily the main owners of the firm or organisation.
Divorce of Ownership and Control
When firms aim for minimum acceptable levels of achievement in terms of profit, revenue and market share.
The Satisfying Principle
An individual business unit providing particular goods and services.
Firm
Comprises a group of competing firms that provide the same goods and services.
Industry
The costs that have already been incurred and cannot be recovered.
Sunk Costs
A firm that has to accept the equilibrium price set by the market in which it operates. Any quantity of goods that it supplies will be sold at the market price.
Price Taker
A market structure in which there are many buyers and sellers. Firms supply similar, but differentiated, goods. There is freedom of entry into the market and freedom of exit out of the market. Knowledge amongst buyers tends to be widespread but is not perfect.
Monopolistic Competition
A market structure in which the supply of goods is dominated by a few firms. There are barriers to entry into the industry and may be barriers to restrict exit from the market by firms. Although some knowledge may be widespread, firms in oligopoly markets are likely to possess some knowledge that is not available to others.
Oligopoly
The behaviour of a firm in terms of its actions in its market and its responses to actions taken by competitors.
Market Conduct
This exists when firms in an oligopolistic market work together in order to reduce the level of competition.
Collusive Oligopoly
This exists when firms in an oligopolistic market do not work together to reduce the level of competition.
Non-collusive Oligopoly
An agreement to restrict competition between firms.
Cartel
Occurs when firms agree to compete through activity, such as marketing, but not through change in price. It usually takes the form of marketing activities such as advertising and promotions. However, it is a more significant characteristic of oligopoly markets because this can create product differentiation. Along with barriers to entry, successful product differentiation can lead to long-term supernormal profits, whereas in monopolistic competition product differentiation only leads to short-term supernormal profits.
Non-price Competition
This exists when the market leader sets a price that smaller competitors follow.
Price Leadership
When oligopolists agree not to compete on the basis of price.
Price Agreements
When oligopolists compete by cutting prices in order to increase their market share.
Price War
This exists when there is a single supplier in a market.
Pure Monopoly
What arises when firms exert considerable influence in a market because of their relatively large size.
Monopoly Power
Occurs when a firm charges different prices to different customers, based on their willingness to pay rather than on differences in the cost of supplying to them.
Price Discrimination
The incessant process by which innovation and new technology constantly lead to the introduction of new production units that replace outdated ones.
Creative Destruction
A market in which behaviour of existing firms is affected by the fear of new competition or takeover.
Contestable Market
A market in which existing firms are not affected by the fear of new competition or takeover and so they use any monopoly power that they possess in order to make supernormal profits.
Non-Contestable Market
Describes firms that enter markets where supernormal profits exist in order to make a quick profit.
Hit-and-run Competition
Measures how well inputs are used to produce an output.
Efficiency
Measures efficiency at a point in time; productive efficiency and allocative efficiency are both measures of this.
Static Efficiency
Arises when production occurs at the lowest possible cost.
Productive Efficiency
Looks at changes over time, arising from new technology, innovation and invention.
Dynamic Efficiency
Where output is maximised from the available inputs of factors of production.
Technical Efficiency
Measures whether the goods and services produced are those that consumers want. It means that no consumer can be made better off without another consumer becoming worse off.
Allocative Efficiency
The difference between the price a buyer would pay and the price actually paid by the buyer.
Consumer Surplus
The difference between the price received by a firm and the price it would have been prepared to accept in return for supplying.
Producer Surplus
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