Business Economics Flashcards
Ceteris Paribus
Ceteris Paribus, a Latin phrase, roughly means “holding other things constant”. This term is most widely used in economics and finance as a shorthand indication of the effect of one economic variable on another, keeping all other variables constant that could render an effect on the second variable.
Variable Cost Ratio
The variable cost ratio is an expression of a company’s variable production costs as a percentage of sales, calculated as variable costs divided by total revenues. It compares costs that change with levels of production to the amount of revenues generated by production. This contrasts with fixed costs that remain constant regardless of production levels.
Correlation Coefficient
The correlation coefficient is a measure that determines the degree to which two variables’ movements are associated. The range of values for the correlation coefficient is -1.0 to 1.0. If a calculated correlation is greater than 1.0 or less than -1.0, a mistake has been made. A correlation of -1.0 indicates a perfect negative correlation, while a correlation of 1.0 indicates a perfect positive correlation.
Random Variable
A random variable is a variable whose value is unknown or a function that assigns values to each of an experiment’s outcomes. Random variables are often designated by letters and can be classified as discrete, which are variables that have specific values, or continuous, which are variables that can have values within a continuous range.
Production Function
The amount of output that will result from one or more combinations of input. The function describes differing technologies capable of producing the same thing.
Inelastic Demand
Inelastic is an economic term used to describe the situation in which the quantity demanded or supplied of a good or service is unaffected when the price of that good or service changes. Inelastic means when the price goes up, consumers’ buying habits stay about the same, and when the price goes down, consumers’ purchasing habits also remain unchanged.
Income
The amount of profit, interest, rent, labour earnings and other payments (including transfers from the government) received, net of taxes paid, measured over a period of time such as a year. Your income is the maximum amount that you could consume and leave your wealth unchanged. It is also referred to as disposable income, to distinguish it from pre-tax income that is not all available to be spent.
Gross Domestic Product
A measure of the market value of the output of the economy in a given period.
Technological Progress
A change in the technology that reduces the amount of resources (labour, machines, land, energy, time) required to produce a given amount of output.
Demographic Transition
A slowdown in population growth as the fall in death rate is more than balanced by a fall in birth rates.
Economic System
An economic system is a way of organising the production and distribution of goods and services in an entire economy.
Capitalism
Capitalism is an economic system in which private property, markets, and firms play an important role.
Institution
The economic definition of an institution refers to the laws and social customs governing the process of production and distribution (who gets what) of goods and services, and how these change over time.
Capital Goods
The equipment, buildings, raw materials, and other inputs used in producing goods and services, including where applicable any patents or other intellectual property that is used.
Market
These allow people to exchange products and services for their mutual benefit.
Firm
A business organisation which employs people, and purchases inputs, to produce and market goods and services at prices that more than cover the cost of production.
Labour Market
In this market employers offer wages to individuals who may agree to work under their direction. Economists say that employers are on the demand side of this market, while employees are on the supply side.
Demand Side
The side of the market on which those participating are offering money in return for some other good or service.
Supply Side
The side of the market on which those participating are offering something in return for money.
Causality
A direction from cause to effect. A variable is said to be causal if a change in this variable produces a change in (“causes”) another. While a correlation is simply an assessment that two things move together, causality establishes the mechanism accounting for the association: causality is therefore a more restrictive concept.
Natural Experiment
An empirical study exploiting naturally occurring statistical controls in which researchers do not have the ability to assign participants to treatment and control groups, as in the case in conventional experiments. Instead, differences in law, policy, weather, or other events can offer the opportunity to analyse populations as if they had been part of the experiment. The validity of such studies depends on the premise that the assignment of subjects to the naturally occurring treatment and control groups can be plausible argued to be random.
Monopoly
A firm that is the only seller of a product without close substitutes; also refers to a market with only one seller. We usually research the label for cases where there are no close substitutes from other firms.
Too Big To Fail
A characteristic of large banks, whose central importance to the economy ensures they will be saved by the government if they are in financial difficulty. If a bank is too big to fail, it does not bear all the costs of its activities and is likely to take bigger risks.
Capitalist Revolution
Rapid improvements in technology combined with the emergence of a new economic system.
Development State
A government that takes a leading role in promoting the process of economic development through its public investments, subsidies of particular industries, education and other policies.
Gini Coefficient
A measure of inequality of a quantity such as income or wealth, varying from a value of zero (if there is no inequality) to one (if a single individual receives all of the quantity).
Lorenz Curve
A graphical representation of inequality of some quantity such as wealth or income. Individuals are arranged in ascending order by how much of this quantity they have: the cumulative share of the total is then plotted against the cumulative share of the population. For complete equality of income, for example, the Lorenz curve would be a straight line with a slope of one; the extent to which the curve falls below this perfect equality line is a measure of inequality.
Economics
The study of how people interact with each other, and with their natural surroundings, in providing livelihoods, and how this changes over time.
Democracy
A political system, defined by individual rights such as freedom of speech, assembly, and the press, fair elections in which virtually all adults are eligible to vote and in which the loser leaves office.
Constant Prices
Prices corrected for increases in prices (inflation) or decreases in prices (deflation) so that a unit of currency represents the same buying power in different periods of time.
Purchasing Power Parity
A statistical correction allowing comparisons of the amount of goods people can buy in different countries that have different currencies.
Equilibrium
A situation that is self-perpetuating. In this case, something of interest does not change unless a force is introduced from outside that alters the basic data describing the situation.
Relative Prices
The price of one good or service, relative to another.
Incentives
Economic rewards or punishments, which influence the benefits and costs of alternative courses of action.
Diminishing Average Product of Labour
A situation which, as more labour is used in a given production process, the average product of that labour typically falls.
Reservation Option
A person’s next best alternative to a particular transaction.
Economic Rent
A payment or other benefit received above and beyond what the individual would have received in the next best alternative.
Isocost Line
A line all of the points of which indicate combinations of inputs that cost a given total amount. With two inputs, it is negatively sloped: the more of one you buy, the less of the other you can afford if your budget is fixed.
Innovation Rents
Profits in excess of economic profits that an innovator gets by introducing a new technology, organisational form or marketing strategy. Also known as Schumperterian rents.
Constrained Choice Problem
These problems provide a way to think rigorously about how we can do the best for ourselves, given our preferences and constraints, and when the things we value are scarce.
Scarcity
A good that is valued, and for which there is an opportunity cost for acquiring more.
Opportunity Cost
When taking an action implies forgoing the opportunity for the next best alternative action, the opportunity cost of action is the net benefit of the alternative.
Marginal Product
At each point on the production function, the marginal product is the additional amount of output that could be produced if the input was increased by one unit, while holding others constant.
Indifference Curve
A curve the points of which indicate the combinations of goods that provide a given level of utility to the individual.
Marginal Rate of Substitution
The MRS corresponds to the trade-off that a problem is willing to make between two goods. At any point, this is the slope of the indifference curve.
Marginal Rate of Transformation (MRT)
The MRT is the quantity of some good that must be sacrificed to acquire one additional unit of another good. At any point, it is the slope of the feasible frontier.
Feasible Set
All of the combinations of the things under consideration that a decision-maker could chose given the economic, physical or other constraints to which he or she is subject.
Budget Constraint
An equation of all combinations of goods and services that one could acquire that exactly exhausts one’s budgetary resources.
Income Effect
The effect that the additional income would have if there were no change in the opportunity cost.
Substitution Effect
The effect of the change in the opportunity cost, given the new level of utility.
Social Dilemma
A situation in which actions taken independently by individuals in pursuit of their own private property objectives results in an outcome which is inferior to some other outcome that is feasible, and which could have occurred if people acted together rather than as individuals.
Free Ride
When there is a cost to individual action, but the others in the group benefit from this action without contributing, the term refers to action taken by these others.
Alturism
The willingness to bear a cost in order to benefit somebody else.
Game Theory
A branch of mathematics that studies strategic interactions, meaning situations in which each actor knows the benefits they receive depend on the actions taken by all.
Social Interactions
Situations in which there are many people, and the actions taken by each person affects that person’s outcome - and other people’s outcomes as well.
Strategic Interaction
A social interaction in which the participants are aware of the ways that their actions affect others (and the ways that actions of others affect them).
Strategy
An action (or course of action) that a person may take when that person is aware of the mutual dependence of the results for herself and for others. The outcomes depend not only on that person’s actions, but also the actions of others.
Game
A mathematical representation of strategic interaction describing the players, the feasible strategies, the information that the players have, and their payoffs.
Division of Labour
The specialisation of producers to carry out different tasks in the production process.
Payoff
The benefit to each player associated with the joint actions of all players.
Best Response
In game theory, the strategy that will yield the highest payoff, given the strategy the other person selects.
Dominant Strategies
Actions that yield the highest payoff for a player, no matter what other players do.
Dominant Strategy Equilibrium
An outcome of a game in which each player plays his or her dominant strategy.
Reciprocity
A preference to be kind or to help others who are kind and helpful, and to withhold help and kindness from people who are not helpful or kind.
Inequality Aversion
A person of this type may care about her own income or wealth, but also prefers an economy with smaller economic differences among its members.
Social Preferences
Preferences that place a value on what happens to other people, and on acting morally, even if it results in lower payoffs for the individual.
Zero Sum Game
A game in which the payoffs of the individuals sum to zero, for all combinations of strategies they might pursue.
