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
