Good understanding for Economics. This note includes the common definition needed for Essay and example can be used to level up your essay. Hence, this acts as catalyst for you to score A* in Economcis Paper 4.
Concentration ratio
Concentration ratio Sum of market share percentage held by the largest specified number of firms in an
industry. It ranges from 0% to 100% and an indicate the degree of competition in the
industry. Low ratio shows greater competition among the firms in that industry.
It is calculated by adding together the total sales for each of the specified number of
largest firms in the industry. That sum is then divided by the total sales of the industry
and converted into percentage.
Herfindahi-Hirschman Index Sum of the square of the percentage market share of each firm summed over the
(HHI) largest 50 firms in a market. It ranges from 0 to 10000 and indicate the degree of
competition in the industry. Low HHI shows greater competition among the firms in
that industry.
Market Structure
Perfect Competition Market structure where there are many very small firms where there is freedom to
entry, all the firms produce identical products and all the firms are price takers
Monopolistic competition Market structure where like perfect competition, there are also very many small firms
and freedom of entry, but where each firm produces a differentiated product thus has
some control over to price
Monopoly Market structure in which a single producer controls the whole supply of a single
product which has no close substitutes
Natural monopoly A monoply that emerges when it can reap very substantial EOS due to very high capital
costs such that the market can accommodate only one firm
Contestable market Market in which the existing firm makes only normal profit, as if cannot set a price
higher than average costs without attracting entry, owing to the absence of barriers
to entry and sunk costs, threat of competition
Oligopoly
Oligopoly Market structure with a few sellers, in which each firm must take account the
behaviour and likely behaviour of rival firms in the industry.
Cartel A formal agreement by firms to operate collectively to raise price or limit output to
reduce competition, in effect acting as a monopoly; and so divide up any monopoly
profits that may be made
Collusive oligopoly Informal arrangement; it arises when firms agree to a form of competitive behaviour
which benefits the firms
Tacit collusion Takes the form of price leadership where the followers keep to the price set by the
leader
Indifference Curve and Budget Line
Indifference curve Combination of two goods that give equal total utility to a consumers
Budget line The different bundles that the consumers can afford
Indifference curve analysis Show how consumer chooses how much to consume of different goods, given the
taste, income and market condition
Substitution effect The adjustment of demand to the relative price change alone
Income effect The adjustment of demand to the change in real income alone
Equity and Equality
Income Flow of money
Wealth Stock of money
Equality Everyone receives the same amount of income and wealth
Equity Refers to a distribution that is fair and just, where people in the same situation receive
equal treatment, normative statement
Lorenz curve Visual representation of income shares received by percentages of the population
Gini coefficient Numerical representation of the Lorenz curve, ratio between the diagonal line of
absolute equality and the total area under the diagonal line (45-degree line)
Merger
Vertical integration Merger of two firms in the same industry but at different stage of prodcution
Horizontal integration Merger of two firms in the same industry and at the same stage of production
Lateral integration A firm merge with another in a similar field
, Conglomerate merger A merger between two different firms operating in different markets
Objective of Firms
Profit maximisation Produce at MC = MR
Revenue maximisation Produce at MR = 0
Volume maximisation Produce at AC = AR
Principal- agent problem Conflict between the objectives of principals which is the owner and those of the
agents who take decision on their behalf which is the manager
Price Discrimination
General definition Occurs when a firm sells the same product to different group of consumers at different
prices when such difference is not cause by the differences cost of production
First degree Occurs when charging consumers at the maximum prices they are willing to pay for a
particular unit of output
Second degree Refer to charging same consumer different prices for different unit of output
Third degree Occurs when the seller divides some consumers into different groups and charges a
different price to each group for the same product
Circular Flow of Income
Circular flow model Model of the economy which shows the movement of physical goods and services
between households, firms, government and the rest of the world and their
corresponding flow of payments in money terms, together with the supply of factor
of production
Injection Money flows into the circular flow; J = I + G + X
Leakage Money flows out of the circular flow; W = S + T + M
Unemployment
General definition Refers to the group of people of the legal age who are willing and able to work and
are actively seeking for a job but unable to find one
Structural unemployment Occurs when mismatches between the demand for labour and the supply of workers
Cyclical unemployment Occurs when there is an adverse changes in level of aggregate demand
Frictional unemployment Where there is movement of worry’s both into and out of employment
Real-wage unemployment Exist when some people are unemployed because real wages are too high
Cost Price and Revenue
Fixed cost Cost that does not vary with output; arise from the use of fixed inputs
Variable cost Cost that vary with output; arise from the use of variable inputs
Explicit cost Payments made by a firm to outsiders to acquire resources for use in production
Implicit cost The sacrificed income arising from the use of self-owned resource by a firm
Supernormal profit The profits that earned by the firms is more than normal profit
Minimum efficient scale The level of output at which LRAC stop falling as output increases
Efficiency
Allocative efficiency Price equal to marginal cost; welfare is maximised; efficient allocation of resources
Productive efficiency Produce at minimum average total cost; no absence of waste in production
Dynamic efficiency Improves the production by introducing new production process
Economic efficiency Both productive and allocative efficiency occur
Pareto efficiency No reallocation of resources can make an individual better off without making some
other individual worse off
Externalities
Merit good Goods deemed socially desirable by the government and generates positive
externalities which government feel that it would be under-consumed due to the
imperfect about its beneficial effects
Demerit good Goods deemed socially undesirable by the government and generate negative
externalities which the government feels that it would be over-consumed due to
imperfect information about its detrimental effects
Externalities Costs and benefits associated with production or consumption of goods spill over to
third parties
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