Chapter 7 Flashcards
Utility
The satisfaction received from consumption of goods or services.
Total utility
Total satisfaction received from
consumption.
Marginal utility
Utility derived from the consumption of one more unit of good or service.
Equimarginal principle
Consumer maximise their utility where their marginal valuation for each product consumed is the same.
Budget lines
The combinations of 2 products obtainable with given income and prices.
Indifference curve
Shows the different combinations of 2 goods that give a consumer equal satisfaction.
Marginal rate of substitution
The rate at which a consumer is willing to substitute one good for another.
Income effect
Following a change in price, a consumer has higher real income and will purchase more of this product.
Giffen good
Demand falls when price of good falls
Economic efficiency
Scarce resources are used in the most efficient way to produce maximum output.
Productive efficiency
Firm is producing at lowest possible cost.
Allocative efficiency
Firms are producing goods and services most wanted by consumers. P=MC
Pareto optimality
Not possible to make someone better off without making someone else worse off.
Dynamic efficiency
A form of productive efficiency that benefits a firm over time.
Market failure
A situation where free markets fail to allocate resources efficiently.
Private costs
Costs that incurred by an individual who produces a good or service.
External costs
Those costs incurred and paid for by third parties not involved in the action.
Social costs
Private costs + external costs
Private benefits
Monetary gain or other forms of benefits that an individual or producer receives from consuming or producing goods or services.
External benefits
Benefits that received by third parties that are not involved in the transaction.
Social benefits
Total benefits arising from a particular action.
Externalities
Actions of producers or consumer give rise to side effects on third parties who are not involved in the actions.
Negative externality
Production or consumption of a
good or service that result a cost to third party.
Positive externality
Production or consumption of a
good or service that creates a benefit to third party.
Asymmetric information
Occurs when one party in the market, usually the seller, has some information that the other party, usually the buyer, does not have.
Adverse selection
Hidden characteristics, when only one party knows more about a situation than the other party.
Moral hazard
Hidden actions, when one party takes actions that the other party cannot observe but which affect both of them.
Cost-benefit analysis
A method that assess the desirability of a project which takes into account of all costs and benefits.
Small and medium enterprise (SME)
Firms with fewer than 250 employees; small firms have fewer than 50 employees.
Natural monopoly
Single supplier has substantial cost advantage such that competing producers will raise cost and create duplication which leads to inefficient use of resources.
X-inefficiency
Costs are above those experienced in a competitive market.
