Edexcel (A) Economics A-level

Theme 3: Business Behaviour and the

Labour Market
Definitions

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Keywords Definition

Allocative efficiency When resources are allocated to the best interests of society, when
there is maximum social welfare and maximum utility; P=MC

Asymmetric Where one party has more information than the other, leading to
information market failure and causing problems for regulators

Average cost/average The cost of production per unit

total cost (AC/ATC) ​ total costs
quantity produced

Average revenue (AR) The price each unit is sold for

​TR
quantity sold

Bilateral monopoly Where there is only one buyer and one seller in the market

Cartels A formal collusive agreement where firms enter into an agreement to

mutually set prices

Collusion Occurs when firms agree to work together, for example by setting a
price or fixing the quantity they produce

Competition policy Government action to increase competition in markets

Competitive tendering When the government contracts out the provision of a good or service
and invites firms to bid for the contract

Conglomerate The merger of firms with no common connection

integration

Constant returns to Output increases by the same proportion that the inputs increase by
scale

Contestable market When there is the threat of new entrants into the market, forcing firms
to be efficient

Decreasing returns to An increase in inputs by a certain proportion will lead to output

scale increasing by a smaller proportion

Demergers A single business is broken into two or more businesses to operate on

their own, to be sold or to be dissolved

Deregulation The removal of legal barriers to allow private enterprises to compete

in a previously protected market

Derived demand The demand for one good is linked to the demand for a related good

Diminishing marginal If a variable factor is increased when another factor is fixed, there will
productivity come a point when each extra unit of the variable factor will produce

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 less extra output than the previous unit; after a certain point, marginal
output falls

Diseconomies of scale The disadvantages that arise in large businesses that reduce
efficiency and cause average costs to rise

Divorce of ownership Firms are owned by shareholders, who have little say in the day to
from control day running of the business, and controlled by managers; this leads to
the principal-agent problem

Dynamic efficiency Efficiency in the long run; concerned with new technology and
increases in productivity which causes efficiency to increase over a
period of time

Economies of scale The advantages of large scale production that enable a large
business to produce at a lower average cost than a smaller business

External economies of An advantage which arises from the growth of the industry within
scale which the firm operates, independent of the firm itself

Fixed cost Costs which do not vary with output

For-profit business A business whose main aim is to make money

Game theory Used to predict the outcome of a decision made by one firm, when it
has incomplete information about the other firm

Geographical mobility The ease and speed at which labour can move from one area to
of labour another

Horizontal integration The merger of firms in the same industry at the same stage of
production

Increasing returns to An increase in inputs by a certain proportion will lead to an increase in

scale output by a larger proportion

Interdependent The actions of one firm directly affects another firm

Internal economies of An advantage that a firm is able to enjoy because of growth in the
scale firm, independent of anything happening to other firms or the industry
in general

Limit pricing When firms set prices low in order to prevent new entrants; used in
contestable markets

Loss When revenue does not cover costs

Marginal cost The additional cost of producing one extra unit of good

Marginal revenue The additional revenue gained by selling one extra unit of good

Maximum wage A ceiling wage which people cannot earn above

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Minimum efficient The lowest level of output necessary to fully exploit economies of
scale scale

Minimum wage A floor wage which people cannot earn below

Monopolistic Where there are a large number of buyers and sellers who are
competition relatively small and act independently, selling non-homogeneous
goods

Monopoly A single seller in the market

Monopsony A single buyer in the market

N-firm concentration The percentage of market share held by the ‘n’ biggest firms
ratio

Nationalisation When a private sector company or industry is brought under state

control, to be owned and managed by the government

Natural monopoly Where economies of scale are so large that not even a single
producer is able to fully exploit them; it is more efficient for there to be
a monopoly than many sellers

Non-collusive When firms in an oligopoly compete against each other, rather than
oligopoly making agreements to reduce competition

Non-price competition When firms compete on factors other than price, for example
customer service or quality; they aim to increase the loyalty to the
brand which makes demand more inelastic

Normal profit The minimum reward required to keep entrepreneurs supplying their
enterprise, the return sufficient to keep the factors of production
committed to the business; TC=TR

Not-for-profit business Where firms are run in order to maximise social welfare and help
individuals and groups; any profit they do make is used to support
their aims

Occupational mobility The ease and speed at which labour can move from one type of job to
of labour another

Oligopoly Where a few firms dominate the market and have the majority of
market share, they act interdependently

Organic growth Where firms grow by increasing their output

Overt collusion Collusion where firms come to a formal agreement, for example a
cartel

Perfect competition A market with many buyers and sellers selling homogenous goods
with perfect information and freedom of entry and exit

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Perfectly contestable A market with no barriers to entry, where a new firm can easily enter
market and compete against incumbent firms completely equally

Predatory pricing When a large, established firm is threatened by new entrants so sets
such a low price that other firms make losses and are driven out the
market

Price leadership Where one firm sets prices and other firms tend to follow this firm as
they are fearful of engaging in a price war

Price wars Where firms continuously drive prices down to the point where they
are frequently making losses and firms are forced to leave

Principal-agent Where the agent makes decisions on behalf of the principal; the agent
problem should maximise the benefits of the principal but have the temptation
of maximising their own benefits

Private sector The part of the economy that is owned and run by individuals or
groups of individuals

Privatisation The sale of government equity in nationalised industries or other firms

to private investors

Productive efficiency When resources are used to give the maximum possible output at the
lowest possible cost; MC=AC

Profit maximisation When firms produce at a point which derives the greatest profit;
MC=MR

Profit satisficing When a firm earn just enough profit to keep its shareholders happy

Public sector The part of the economy that is owned or controlled by local or central
government

Regulatory capture When regulators become more empathetic and are able to ‘see things
from the firm’s perspective’, which removes impartiality and weakens
their ability to regulate

Revenue maximisation When firms produce at a point which derives the greatest revenue;
MR=0

Sales maximisation When firms produce at a point where they sell as many of their goods
and services as possible without making a loss; AR=AC

Static efficiency The level of efficiency at one point in time

Sunk cost Costs that cannot be recovered once they have been spent

Supernormal profit The profit above normal profit, TR>TC

Tacit collusion Collusion where there is no formal agreement, such as price

leadership

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Third degree price When monopolists charge different prices to different groups for the
discrimination same good or service

Total cost The cost to produce a given level of output

total variable costs+total fixed costs

Total revenue Revenue generated from the sale of a given level of output
price x quantity sold

Variable cost Costs which change with output

Vertical integration When a firm merges or takes over another firm in the same industry,
but at a different stage of production

X-inefficiency When firms produce at a cost above the AC curve

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