Definitions Flashcards
Economic growth
Increase in national output within an economy in a year
Actual growth
Increase in real GDP via more efficient resource allocation
Potential growth
Increase in resources
Economic development
Sustainable increase in standards of living (income per capita, health, education, environment)
PPF
Maximum attainable output of a country given its limited resources and tech
Opportunity cost
What one needs to sacrifice when an economic decision takes place
Pareto optimal
We cannot make one better off without making the other worse off, PPC (opportunity cost, scarcity)
Demand
Quantity that consumers are willing and able to buy at a given price, CP
Law of Demand
Fall in price good X, increase in Qd for good X
Theory of diminishing marginal utility
The more you buy, the more your utility decreases
Substitute
Good/service as an alternative to another good (coffee, tea)
Complementary good
Good/service that is bought with another good but paid separately (tennis racket, tennis balls)
Inferior good
When income increases, demand decreases (fast food)
Normal good
When income increases, demand increases (luxury cars)
Market
Where buyers and sellers meet
Supply
Q that producers are willing/able to sell at a given price
Law of Supply
Price increases, Qs increases
Law of Diminishing Marginal Returns
Increase in a resource unit (labor/capital) eventually leads to a decrease in marginal product
Competitive supply
Several producers produce same/similar goods hence they are incentivised to offer the most competitive price and differentiate (phones)
Joint Supply
When two different goods are produced simultaneously. Price of Good X can affect supply of Good Y. (meat, leather)
Free market
- Decisions made by producers and consumers
- Decisions driven by market forces; price competition, demand, supply
- Private property
- Profit motive
- Got only ensure property and contract rights are ensured to regulate competition
Planned/Command Economy
- Everything is controlled by the gvt
- Resources allocated by the state
- No private ownership
- Who/What/How to produce decided by get
- Social welfare over profit
Mixed economy
- Resources allocated by market forces and gvt
- Gvt can intervene to fix market failure and achieve social goals
- Some private ownership
Rationing function of price
- Allocates resources
- When demand > supply, P increases, limiting consumption of those unwilling to pay a higher price
- Viceversa if a surplus occurs
Signaling function of price
- Convey info about market’s conditions and value of goods and services
- Prices are high -> shortage of good -> resources should be diverted into that good
- Viceversa for lower prices/oversupply
Incentive function of price
- Price determines consumer/producer behaviour
- When prices are high, firms want to produce more, consumers buy less and viceversa
Consumer surplus
Difference between max amount a consumer is willing / able to pay for a good vs what they actually pay
Producer surplus
Difference between actual price received for a good vs price they were willing to accept
Marginal cost
Additional cost of a firm to produce 1 extra unit of output
Supply
Marginal Benefit
Additional benefit received by a consumer from consuming an extra unit of a good. Max price a consumer is willing / able to pay for an extra unit
Demand
Transitional economy
An economy transitioning from planned to free market through
- Deregulation
- Privatization
- MArket liberalisation
Consumer rationality
When consumers makes choices based on taste and preference
Completeness assumption
Consumers know their preferences and can rank them
Transitivity assumption
If a consumer prefers good A over B, and B over C they will automatically prefer good A over C. Their taste is consistent
Non satiation assumption
Consumers will always prefer more of a good rather than less
Bias
Systematic error in thinking and decision making
Rule of thumb
- Simple / easy to apply decision making shortcuts
- Thinking that higher price = better quality
Framing bias
- Way in which info is presented can affect one’s perception
- 50% chance of doubling initial investment rather than 50% chance of losing investment money
Anchoring bias
- Relying too heavily on the initial info provided
- Buying a 50$ shirt rather than 100$ one even though both are expensive
Availability bias
- Giving more weight to easily rememberable / available info
- Purchasing product advertised on a billboard
Bounded rationality
- Herbert Simon
- Humans don’t have unlimited capacity for processing information
- Searching for information to maximise utility is costly
- Instead of maximising, consumers will satisfice (satisfactory outcome > best outcome)
Bounded self control
- People exercise self control to certain limits
- Consumers spend too much / save too little
Bounded selfishness
- People are selfish within limits
- May want to contribute to a public good rather than maximising their own utility, sacrificing personal welfare
Nudge theory
- Behavioral economics
- Individuals can be easily influenced by environment and choice presentation into making decisions via subtle changes called ‘nudges’
- No financial incentives, sanctions, choice limitations
Default choice
Choices made by default
- Organ donation in Italy, France, UK are default
Restricted choice
Choices limited by gvt or authority
- Speed limits, voting/smoking age
Mandated choice
Compulsory choice between alternatives
- Deciding to donate organs, deciding to make a living will
PED
Measure of responsiveness of Qd for a good in respect to a change in price
- Always negative due to law of Demand
Tax incidence
Who ends up paying a tax (tax shifting). In the case of an indirect tax consumers may pay the tax wholly or partially
Flat rate/specific tax
Same amount of tax per each unit sold
- Usually per litre or kilo
Ad valorem tax
Indirect tax expressed as a percentage of price of a good
Primary commodities
Necessities w no substitutes, PED inelastic
YED
Measure of responsiveness of demand of a good with respect to a change in consumer income
PES
Measure of responsiveness of Qs with respect to a change in price
- Always positive due to law of supply
Maximum price
When gvt sets a price below equilibrium, only prices below equilibrium are allowed not above. Increases availability and equality.
Minimum price
When gvt sets a price above equilibrium, only prices above are allowed.
Protects and aids certain suppliers.
Indirect tax
Tax imposed on spending to buy goods/services
Can be excise or on all/most goods VAT/IVA
Excise tax
Indirect tax imposed on particular goods (cigs, alc, petrol). Can be advalorem or specific.
Subsidy
Assistance by gvt to individuals or group of individuals to increase production or consumption of a good
Merit goods
Goods/services which are often undervalued and under consumed by consumers with positive externalities which are ought to be subsidised
(education, health, renewable energy)
