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Adjustment costs

Definition of adjustment costs This is the cost to a firm of altering its level of output. For example, it may be desirable for a firm to cut down on its output, but doing this will create adjustment costs such as redundancy payments and lower staff morale. On reflection of its adjustment costs, it may be more desirable to keep producing at a sub-optimum level. Similarly, a rapid expanse of output may create problems such as difficulties in negotiating a bigger place to rent and the difficulties in hiring more workers. Impact of…

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Administration order

Administration occurs when a firm gets into financial difficulties and is taking into administration by an independent administer. The job of an administer is to try and get the firm out of difficulties and avoid insolvency. If the administer is not able to keep the firm as a going concern, it will try and get the best deal for its creditors. Administrative receivership This occurs when a firm fails to keep up its loan repayments. In this case an administrative receiver can be appointed, their job is to try and get…

Adverse selection explained

Adverse selection explained

Definition of adverse selection: Adverse selection occurs when buyers have better information than sellers, and this can distort the usual market process. It can lead to missing markets as firms do not find it profitable to sell a good. Adverse selection explainedA company selling life insurance will find that people at higher risk of death will be more willing to take out life insurance. If the insurance company charges an average price, but only high-risk consumers buy – they will make a loss. A company insuring cars will find those…

SRAS-shift-left

Adverse supply side shock

An adverse supply side shock is an event that causes an unexpected increase in costs or disruption to production. This will cause the short-run aggregate supply curve to shift to the left, leading to higher inflation and lower output. Diagram showing supply-side shockSRAS shifting to the left causes a higher price level and lower real GDP. Causes of adverse supply side shocksRising oil prices e.g. cartel activity by OPEC restricting supply…

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Advertising techniques

Advertising is the attempt by firms to raise awareness of their brand and product in the hope of making greater sales. Advertising can involve various media but the most common include:TV internet Radio Product endorsements Sporting EventsPersuasive advertising Attempts to get customers to buy products who are otherwise unlikely to purchase the good. Sometimes persuasive advertising can verge on the exploitative. For example, subliminal advertising messages are illegal in most countries. Informative advertising Supporters of advertising argue that advertising can be useful for informing customers about a greater range of products. Costs of advertising Billions of pounds are spent…

After sales service

After sales service

After sales service refers to the treatment of customers in the aftermath of a sale. For example, after being sold a bike, after sales service may involve free bike maintenance for a number of weeks. After sales service is an important part of non-price competition often found in oligopoly. After sales service can be a way to encourage people to buy the product in the first place; it can be used to justify a higher price for the good. It also influences the long-term reputation of the firm and can…

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After tax income

After tax income is the income remaining after the government has subtracted income tax (and other related income taxes like national insurance) It does not take into account indirect taxes like VAT. These taxes are paid when consuming goods. Another term for after tax income is disposable income. Disposable income is often confused with discretionary income. Discretionary income is the income available to spend after also including taxes and normal living expenses. RelatedTax rates in the UK 

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Agglomeration economies

Agglomeration economies or external economies of scale refer to the benefits from concentrating output and housing in particular areas. If an area specialises in the production of a certain type of good, all firms can benefit from various factors such as:Good supply networks Supply of trained workers Infrastructure built specifically for the industry Good transport links.Due to agglomeration economies, people and firms often concentrate in particular areas. For example, people tend to move to cities where is there is a greater choice of jobs, social activities and specialist services However,…