Defenitions Flashcards
Allocative efficiency?
When economic resources are utilised to produce the combination of goods and services that maximise economic welfare
Allocative price function
Prices allocate resources away from the markets with excess supply to markets with excess demand
Capital
Producer goods
Capital/producer goods
Goods used in the production of other goods
Certeris paribus
The assumption that all other things remain constant
Choice
Selecting one of multiple alternatives when deciding how to allocate scarce resources
Consumer good
Goods consumed by households and individuals which are used to satisfy the needs and wants
Economic welfare
The economic satisfaction/wellbeing of individuals/households/groups in an economy
Enterprise
The ability to utilise factors of production effectively
Factors of production
Inputs of the production process, such as land, labour, capital and
enterprise.
Finite resource
Non-renewable resource that becomes increasingly scarce.
Fundamental economic problem
Deciding how to best allocate scarce resources to maximise overall economic welfare.
Imperfect information
When individuals lack the information to make the best decision
Incentive price function
Prices create incentives for people to adjust their economic transactions
Infrastructure
Facilities required for an economy to function
Labour
Workers with human capital
Land
Natural physical materials, as well as space for fixed capital
Need
Something necessary for human survival, e.g. food, shelter.
Normative statement
Statements including value judgements, that cannot be easily proved/disproved.
Opportunity cost
Loss of other alternatives due to selecting one of a set of options.
Pareto efficiency
State of resource allocation, where in order to make an economic agent better off, another agent is made worse off (it is similar to allocative efficiency)
Positive statement
Statements including facts, that can easily be proved/disproved.
PPF
Production possibility frontier
A curve displaying the various possible combinations of two products that can be produced with finite resources.
Rationing price function
Prices rise to ration demand for goods
Renewable resource
Restorable resource that can be replenished
Scarcity
Resulting from the concept of infinite wants and needs, yet limited resources.
Signalling price function
Prices provide information to sellers and buyers, influencing economic decisions.
Trade
Buying and selling of goods and services
Value judgemnt
Statements that are subjective and based on opinion rather than factual evidence
Want
Something desirable, yet not necessary for human survival.
Altruism
The selfless and disinterested concern towards the wellbeing of others.
Anchoring bias
Individuals tend to rely on the first piece of information they are given.
Asymmetric imformation
When one party (buyers or sellers) has more information than the other in an economic transaction.
Availability bias
Individuals base the likeliness of future events occurring on past events.
Behavioural economics
Branch of economics that incorporates psychological insights to
understand human economic decision making.
Bounded rationality
Individuals’ inability to make rational economic decision making due to imperfect information, time constraints and limited mental processing ability.
Bounded self control
Individuals’ inability to make rational economic decision making due to inability to control themselves.
Choice architecture
A framework illustrating the effects of presenting choices in different ways.
Economic man (homo economicus)
A hypothetical person who behaves in exact accordance with their rational self-interest.
Heuristics
Rules of thumb
Hyperbolic discounting
Individuals tend to base the value of rewards on the amount of time taken to acquire the reward (longer waits, less valuable).
Perfect information
When both buyers and sellers have full knowledge of goods and services in a market.
Risk aversion
Individuals tend to value losses more than commensurate gains.
Symmetric information
Where consumers and producers have sufficient information to
make rational decisions.
Utility
Benefit, wellbeing, welfare or satisfaction gained from consumption of a good or service.
Utility maximisation
When consumers aim to make their personal welfare as high as possible.
Competing supply
When resources can be used to produce one good OR another good, not both.
Perfectly Competitive markets
A market with large numbers of buyers and sellers, with low barriers to entry and exit.
Complementary goods
Goods in joint demand; these goods are often bought together, e.g. printers and ink cartridges.
Composite demand
Demand for a multi purposed goods (they will automatically have more utility than goods which can only do one thing)
Condition of demand
A determinant of demand other than the good’s price, that sets the position of the good’s demand curve.
Condition of supply
A determinant of supply other than the good’s price, that sets the position of the good’s supply curve.
Customer sovereignty
Consumers can collectively govern production in a market via exercising spending power. Strongest in perfectly competitive markets.
XED
Cross elasticity of demand
Measures the responsiveness of a good’s demand to a change in the price of a different good.
Demand
The quantity of a good or service that a consumer is willing and able to buy at a given price, at a given time.
Derived demand
Demand for a good that is the input of another good.
Disequilibrium
Excess supply or demand in a market.
Effective demand
Desire for a good or service that is backed by the ability to pay for said good or service.
Elasticity
The proportionate responsiveness of a second variable to a change in a first variable.
Equilibrium
No excess supply or demand in a market; a state of balance between opposing forces
Equilibrium price
The price where planned demand matches planned supply.
Excess demand
When consumers want to buy more than producers are willing to sell; occurs below equilibrium price.
Excess supply
When producers want to sell more than consumers are willing to buy; occurs above equilibrium price.
Exchange
Trading objects of value, utilising medium of exchange e.g. money or gold
YED
Income elasticity of demand
Measures the responsiveness of a good’s demand to a change in the incomes of consumers.
Inferior good
A good for which demand rises as incomes fall.
Joint supply
When one good is produced, another good is also produced from the same raw materials.
Normal good
A good for which demand rises as incomes rise.
PED
Price elasticity of demand
Measures the responsiveness of a good’s supply to a change in price.
Producer sovereignty
Producers determine what is produced and the prices charged.
Substitute good
A good in competing demand; a good that can be used in place of another similar good.
Supply
The quantity of a good or service that a producer is willing and able to sell at a given price, at a given time
Automation
Automatic control; the process by which machines control other machines
Average cost
Total production cost divided by total output (cost per unit of output).
Average revenue
Total revenue divided by total output (revenue per unit of output).
Capital productivity
Output per unit of capital
Constant returns of scale
When output increases by an equal proportion the increase in inputs
Decreasing returns to scale
When output increases by a smaller proportion than the increase in inputs
Diseconomies of scale
When long-run average costs rise as output rises.
Division of labour
Different workers performing different tasks in a good’s/services’ production, specialising to an extent.
Economies of scope
When it is cheaper to make a range of products
Economies of scales
When long-run average costs fall as output rises.
External economy of scale
Firms saving resulting from growth of the industry a firm is part of.
Fixed cost
Costs of production that do not vary with output, only in the short run.
Increasing returns to scale
When output increases by a larger proportion than the increase in inputs
Internal economies to scale
Firms saving resulting from growth of the firm itself.
Labour productivity
Output per worker
Law of diminishing returns
By continually buying or investing in a good the extra utility or profit received will start to decrease after a certain point and will eventually reach 0
Long run
Time period in which none of the factors of production are fixed, and all can be varied.
Long run average cost
Long-run total cost per unit of output.
Long run production
a period of time where all factors of production and costs are variable.
Mecanisation
When a firm transfers from becoming more labour intensive to becoming more capital intensive
MES
Minimum efficient scale
The lowest level of output at which average costs are minimised. Dependent on the market structure as well as barriers to entry
Normal profit
Total revenue equals total costs; the minimum profit required to keep a firm operating in an industry
Operating costs
Same as variable costs
Overheads
Same as fixed costs
Production
A set of processes that converts inputs into outputs
Productive efficiency
Minimised average total cost
Productivity
Output per unit of input
Profit
Total revenue subtract total costs
Rate of return
Income received from investment
Returns to scale
The scale by which a firm’s output changes as the scale of all inputs are altered
Short run
Time period in which at least one of the factors of production are fixed and cannot be varied.
Specialisation
A worker only performing a specific task or a small range of tasks.
Sunk cost
Non-recoverable costs of entering a market
Supernormal profit
Also known as abnormal profit
Any level of profit over and above normal profit
Technical economy of scale
Cost saving through changing the production process.
Total cost
Total fixed cost added to total variable cost.
Total revenue
Price of each good, multiplied by quantity sold.
Variable costs
Costs incurred when paying for the variable factors of production.
X efficiency
The process through which a firm tries to reduce their AC by reducing waste eg in materials are in time
Anti-competitive behaviour
Business strategies employed to deliberately limit contestability within markets
Artificial barrier to entry
Barriers to market entry that are man-made, i.e., non-natural.
Break even
The same as normal profit
Cartel
Formed by groups of producers when they illegally decide to collude and not compete
Collective bargaining
When the members of a union act as a unit to increase bargaining power when negotiating with employers
Collusion
Illegal cooperation between multiple firms, forming a cartel
Concentrated market
A market with very few (in its most extreme cases, 1) firms.
Concentrated ratio
The total market share of the leading firms in an industry; these firms’ output as a percentage of total output.
Consumer surplus
Difference between the prices consumers are willing to pay and the prices they actually pay
Contestability
Ease with which competitors can enter a market
Deadweight loss
Loss of social welfare derived from economic activity
Demerger
When a firm sells parts of its business to create separate smaller firms
Divorce of ownership and control
The process in which owners become increasingly separated from those managing the business
Duopoly
Any market that is dominated by two organisations
Duopsony
Two major buyers of a good or service in a market
Dynamic efficiency
Improvements to efficiency in the long run, brought about by investment into research and development
Entry barrier
Make it impossible/more difficult for firms to enter a market.
Exit barrier
Make it impossible/more difficult for firms to exit a market.
Game theory
Where there are two or more interacting decision makers and different (groups of) decisions lead to differing outcomes
Hit and run
Firms enter a market, make supernormal profits, then leave; possible due to low barriers to entry and exit
Imperfect competition
Any market structure between the extremes of perfect competition and a pure monopoly.
Innovation
Improving upon an existing product or process
Interdependence
Where the actions of one firm influence the actions of other firms in the market
Invention
Creation of a new products or process
Kinked demand curve
Assumes a business may face a dual demand curve for its product based on the oligopoly market structure
Limit pricing
Lowering the price of a good or service to around average cost, creating an artificial barrier to entry
Market share maximisation
When a firm maximises their percentage share of the market in which it sells its product.
Market structure
The characteristics of a market
Merger
Multiple firms uniting to form one larger firm
Monopoly
Market with only one supplier/ one dominant supplier
Monopoly power
The ability of a firm to be a price maker rather than a price taker; the ability to set prices.
Monopsony
Market with only one consumer/ one dominant consumer
Natural barrier to entry
Barriers to market entry that are not man-made.
Natural monopoly
When the ideal number of firms in an industry is 1.
Oligopoly
A market dominated by a few firms
Patent
Government legislation protecting a firm’s right to be the sole producer of a good
Predatory pricing
Temporarily lowering a good’s price below average cost, creating an artificial barrier to entry.
Price competition
Reducing the price of a product, thus stripping demand from competitors.
Price discrimination
When a firm charges different prices to different groups of consumers for the same good
Price leadership
The dominant firm in the market sets the price and less dominant firms alter their prices accordingly
Price maker
A firm with monopoly power; the ability to set prices
Price taker
A firm that passively accepts the market price, set by forces beyond the firm’s
control.
Proce war
Where multiple firms cut prices, each firm trying to undercut its competitors and gain market demand
Principal-agent problem
Where those in control of a firm (agents), act in their own best interest, rather than that of the owners (principals)
Producer surplus
Difference between the prices producers are willing to accept and the prices they actually accept
Product differentiation
Differences between multiple similar goods and services.
Profit maximisation
Occurs where the positive difference between total revenue and total costs is at its highest.
Pure monopoly
Only one firm in the market
Sales maximisation
When sales revenue is at its highest
Satisficing
Due to conflicts of interests, managers often run films to make the minimum level of acceptable profit (as specified by owners)
Shareholder
Economic agents concerned on the growth of the firm for monetary reasons
Stakeholder
Economic agents concerned on the growth of the firm for not necessarily monetary reasons
Static efficiency
Efficiency in the short run
Takeover
When a firm buys another firm, with the latter becoming a part of the former
6 The Labour Market
Bilateral monopoly
Market in which there is a single seller and a single buyer.
Human capital
The economic value of an individual’s skills, experience, training, etc.
Labour exploitation
Employers benefiting from treating employees unfairly.
MPP
Marginal physical product
Additional output each unit of labour can produce.
Marginal productivity theory
Theory stating demand for labour is derived from MRP.
MRP
Marginal revenue productivity
Additional revenue derived per extra unit of labour.
Monopsony power
The ability to set prices based on bargaining power.
National living wage
The legal minimum hourly wage set by the government. But only if you are over 23 (if not over 23 you get the NMW)
Negative discrimination
When employers undervalue the marginal revenue productivity of a worker.
Positive discrimination
When employers overvalue the marginal revenue productivity of a worker.
Trade union
Organisation within or outside a firm campaigning for the rights of the workers.
Trade union wage gap
The difference in wages between those in a trade union and those not in a trade union; an indicator of trade union power.
Wage differentials
Differences in wages of different groups of workers, or workers in the same occupation.
Wage discrimination
Paying an employee lower wages because of their race, gender, religion, disability, sexual orientation or some other ‘protected characteristic’.
Absolute poverty
When a person doesn’t have enough income to fulfil basic needs.
(Below 2 dollars - World Bank)
Distribution of income and wealth
The way in which total income and wealth are divided
among the population of the economy.
Earnings trap
Situations where the more an individual earns, the less they are entitled to, making it hard to escape poverty.
Equity
Fairness, justness. Involves value judgements
Fiscal drag
As wages rise, a higher proportion of income is paid in tax due to freezing of tax brackets
Gini coefficient
Measures income or wealth inequality; maximum inequality is 1.
Horizontal equity
People in identical circumstances are treated equally.
Hysteresis
Effects that persist even after the initial causes giving rise to the effects are removed.
Inequity
Unfairness, unjustness. Involves value judgements.
Kuznets hypothesis
Theory that as an economy grows, inequality is initially increased, then decreased.
Lorenz curve
Can be used to illustrate and measure distributive inequalities.
Means tested benefits
Entitlement to certain benefits depends on whether the income or wealth of an individual is below a certain level.
Poverty trap
Where a rise in income leads to a decrease in eligibility in benefits, forcing individuals deeper into poverty
Vertical equity
People in different circumstances are treated unequally yet fairly.
Ad valorem taxes
Taxes that are a percentage of price
Asymmetric information
When one party knows more or has better information than the other party in a transaction e.g a patient and doctor.
CMA
Competition and Markets Authority
Government department in the UK that aims to reduce anti-competitive strategies.
Competition policy
Government intervention that reduces monopoly power and introduces competition to reduce consumer exploitation.
Complete market failure
Occurs when there is a missing market
Consumption externality
An externality (which may be positive or negative) generated
through consumption of a good or service.
Demerit good
Goods where the social costs in consumption exceed the private costs in consumption.
BIS
Department for Business, Innovation and Skills
An organisation that aims to enhance UK industry performance.
Deregulate
To reduce the amount an industry is regulated.
Economic welfare
Quality of life of a population
EU directories
Set of checks that EU members must pass, ensuring all members have similar or the same legislation.
EU regulations
Set of laws all EU members must comply with.
Externality
External effects imposed on society derived from the production or consumption
of a good or service.
Free rider problem
Once a public good is produced, there is no way to control who benefits from it.
Geographical immobility of labour
Occurs where workers find it difficult to relocate to places where jobs exist e.g housing costs.
Government failure
Where government intervention leads to a lessening of economic welfare and a misallocation of resources.
Government intervention
When a government actively intervenes and affects market operation.
Immobility of factors of production
When it is hard for factors of production to move across different areas within the economy.
Immobility of labour
The inability of labour to move from one occupation to another. There are two main types, geographical and occupational
Imperfect information
When an economic agent does not hold all the necessary information to make an informed decision about a product.
Incentive
Something that motivates an agent in the economy.
Income inequality
Differences in size of earnings between households/individuals.
Market distortion
Where interference in a market affects behaviour and prices/output.
Market economy
Where output and prices are determined by the workings of supply and
demand.
Market failure
Occurs when the market mechanism leads to a misallocation of resources
Merit good
Goods where the social costs in consumption deceed the private costs in consumption.
Misallocation of resources
Resources are not distributed optimally
Nationalise
To convert from private ownership to public (government) ownership
Negative externality
Negative external effects imposed on society derived from the production or consumption of a good or service.
Non-excludable
A good or service where you are unable to prevent non-paying consumers from benefiting or using the good.
Non-rival
Where one person’s consumption of a good or service does not decrease the amount available for consumption by another consumer
Occupational immobility of labour
Occurs where workers find it difficult to transfer between different occupations due to a lack of transferable skills.
Outsourcing
When a private sector firm bids to offer a public service.
Partial market failure
Occurs when the market is producing a good or service, but at the
wrong quantity or price.
Penalties
Fines or other forms of punishment that make producing output less profitable.
Positive externalities
Positive external effects imposed on society derived from the production or consumption of a good or service.
Price ceiling
A price above which trade is illegal.
Price controls
Government controls on prices e.g maximum or minimum prices.
Price floor
A price below which trade is illegal
Private benefit
Benefits incurred to the individual through consumption or production
Private cost
Costs incurred to the individual through consumption or production.
Price mechanism
The way in which prices are determined through forces of supply and demand
Private good
An excludable, rival good
Privatise
To convert from public (government) ownership to private ownership.
Production externality
An externality (which may be positive or negative) generated through production of a good or service.
Productivity gap
Difference between productivity of UK labour and other countries’ labour.
Property right
Legal ownership of a resource.
Public good
A non-excludable, non-rival good.
Public sector
The part of the government financed by and controlled by the government.
Quasi public good
A good that is not fully non-rival and/or not fully non-excludable.
Goods that have characteristics of both public and private goods.
Rationing
Limiting the amount or quantity of a good.
Regulation
Imposing policies, rules, laws, constraints, etc.
Regulatory capture
Regulatory bodies become dominated by the industries in which they
were regulating, leading to a decrease in economic welfare.
Resource misallocation
When resources are allocated in a way that doesn’t maximise economic welfare.
Signalling
Where a change in the price of goods or services that show that supply or demand should be adjusted.
Social benefits
The sum of private benefits and external benefits.
Social cost
The sum of private costs and external costs.
Specific taxes
Taxes that are a set price per unit.
State provision
Where the government provides a good or service.
Subsidy
Payment made by the government (or other authority) to incentivise production of a good.
Tax
Compulsory levy imposed by the government to de-incentivise production of a good.
Unintended consequences
When the actions of people or a government have consequences that were not anticipated.
Vouchers
Allowances to utilise goods or services at a discount rate.
