Economics (Fach) / Definitions 2 (Lektion)

Definitions 2

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• Marginal Utility (MU): The extra satisfaction gained from consuming one extra unit of a goods within a given time period.
• Consumer Surplus The difference between how much a consumer is willing to pay for a good and how much they actually pay for it.
• Consumer Durable A consumer good that lasts a period of time, during which the consumer can continue gaining utility from it
• Risk: This is when an outcome may or may not occur, but where the probability of its occurring is known.
• Uncertainty This is when an outcome may or may not occur and where the probability of its occurring is not known.
• Spreading Risks (for an Insurance Company): The more policies an insurance company issues and the more independent the risks of claims from these policies are, the more predictable will be the number of claims.
• Law of Large Numbers The larger the number of events of a particular type, the more predictable will be their average outcome.
• Adverse Selection Where information is imperfect, high-risk/ poor-quality groups will be attracted to profitable market opportunities to the disadvantage of the average buyer (or seller).
• Moral Hazard: Following a deal, if there are information asymmetries, it is likely that one party will engage in problematic (immoral and/ or hazardous) behavior to the detriment of the other. In other words, lack of information by one party to the deal may result in the deal not being honoured by the other party.
• Independent Risks: Where two risky events are unconnected. The occurrence of one will not affect the likelihood of the occurrence of the other.
• Diversification: Where a firm expands into new types of business
• Observations of Market Behaviour Information gathered about consumers from the day-to-day activities of the business within the market.
• Market Surveys Information gathered about consumers, usually via a questionnaire, that attempts to enhance the business’s understanding of consumer behavior.
• Market Experiments Information gathered about consumers under artificial or simulated conditions. A method used widely in assessing the effects of advertising on consumers.
• Non-Price Competition Competition in terms of product promotion (advertising, packaging, etc.) or product development.
• Product Differentiation : Where a firm’s product is in some way distinct from its rivals’ products. In the context of growth strategies, this is where a business upgrades existing products or services so as to make them different from those of rival firms.
• Fixed Input An input that cannot be increased in supply within a given time period
• Variable Input An input that can be increased in supply within a given time period
• Short Run: The period of time over which at least one input is fixed.
• Long Run The period of time long enough for all inputs to be varied.
• Law of diminishing (marginal) Returns When one or more inputs are held fixed, there will come a point beyond which the extra output from additional units of the variable input will diminish.
• Explicit Costs The payments to outside suppliers of inputs
• Implicit Costs Costs which do not involve a direct payment of money to a third party, but which nevertheless involve a sacrifice of some alternative.
• Historic Cost The original amount the firm paid for inputs it now owns.
• Replacement Costs What the firm would have to pay to replace inputs it currently owns.
• Economies of Scale : When increasing the scale of production leads to a lower cost per unit of output.
• Specialisation and Division of Labour Where production is broken down into a number of simpler, more specialised tasks, thus allowing workers to acquire a high degree of efficiency
• Indivisibilities The impossibility of dividing an input into smaller units
• Plant economies of Scale Economies of scale that arise because of the large size of the factory.
• Rationalisation The reorganising of production (often after a merger) so as to cut out waste and duplication and generally to reduce costs.
• Overheads Costs arising from the general running of an organisation, and only indirectly related to the level of output.
• Economies of Scope When increasing the range of products produced by a firm reduces the cost of producing each one.
• Diseconomies of Scale Where costs per unit of output increase as the scale of production increases
• External Economies of Scale Where a firm’s costs per unit of output decrease as the size of the whole industry grows.
• Industry’s Infrastructure The network of supply agents, communications, skills, training facilities, distribution channels, specialised financial services, etc. That support a particular industry.
• External Diseconomies of Scale Where a firm’s costs per unit of output increase as the size of the whole industry increases.
• Long-Run Average Cost (LRAC) Curves : A curve that shows how average cost varies with output on the assumption that all factors are variable.
• Transaction Costs The costs associated with exchanging products. For buyers it is the costs over and above the price of the product. For sellers it is the costs over and above the costs of production
• Logistics: The business of managing and handling inputs to and outputs from a firm.
• Vertically Integrated Firm A firm that produces at more than one stage in the production and distribution of a product.
• Supply Chain The flow of inputs into a finished product, from the raw materials stage, through manufacturing and distribution, right through to the sale to the final consumer.
• Backward Integration Where a firm expands backwards down the supply chain to earlier stages of production.
• Forward Integration Where a firm expands forward up the supply chain towards the sale of the finished product.
• Average Revenue (AR Total revenue per unit of output. When all output is sold at the same price, average revenue will be the same as price: AR = TR / Q = P.
• Normal Profit : The opportunity cost of being in business. It consists of the interest that could be earned on a riskless asset, plus a return for risk taking in this particular industry. It is counted as a cost of production.
• Supernormal Profit The excess of total profit above normal profit.
• Short Run under perfect Competition The period during which there is too little time for new firms to enter the industry.
• Profit-Maximising Rule Profit is maximized where marginal revenue equals marginal cost.
• Short Run Shut-Down Point Where the AR curve is tangential to the AVC curve. The firm can only just cover its variable costs. Any fall in revenue below this level will cause a profit-maximising firm to shut down immediately.
• Long Run under Perfect Competition The period of time which is long enough for new firms to enter the industry.

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