S-Cool Revision Summary

S-Cool Revision Summary


Allocative efficiency

A firm is allocatively efficient if it produces at the level of output where its price is equal to its marginal cost. For a whole economy to be allocatively efficient, this must occur in all markets.


Ceteris paribus

This is a Latin phrase meaning 'all other things being equal'. It is used in economics because it would be difficult to assess the relationship between one variable and another without assuming that all other variables remain constant. It's a bit like having the 'control' in science experiments.


Externality

An externality is a sort of 'by-product' of a certain production process, or of consuming something, that affects a third party. This effect can be positive or negative. Consuming education has a positive effect on the rest of society, and pollution is an example of a negative by-product of a production process that will affect a third party (affluent pumped into a river that is used by fisherman, for example)


Imperfect competition

Technically, this includes any market structure that is not perfect competition. It includes, therefore, monopoly, oligopoly and monopolistic competition (see the topic of 'Market structure' for details).


Menu costs

Menu costs refer to the costs incurred when a business has to change its price list. The costs are relatively small, but they are annoying and significant, especially in times of galloping inflation


Monopoly

This is the least competitive form of market structure. A monopolist is the only firm in the industry, and so has total power. Monopolists tend to maximise profits to the detriment of efficiency.


Opportunity cost

The opportunity cost is the sacrifice when an individual chooses one set of wants over another in the situation of scarce resources. The production possibility frontier illustrates this concept well. If an economy is on its PPF and wants more non-military goods (for example), it will have to give up the production of some military goods.


Perfect competition

This is the most competitive form of market structure. Firms in perfect competition have numerous characteristics (see the topic of 'Market structure' for details). It is felt that this is the most efficient of all the market structures. Unfortunately, it is also the most unrealistic!


Production possibility frontier

This is a curve that tends to be convex to the origin and shows all the possible combinations of two mutually exclusive groups of goods (military and non-military goods, for example) where all the economy's resources are being used and in the most efficient way possible. It is important that both of those conditions are fulfilled for an economy to be in a situation on rather than within its PPF.


Productive efficiency

A firm is productively efficient if is producing at a level of output where average costs are at a minimum. This occurs at the bottom of the average cost curve, where the marginal cost curve crosses.