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LUBS 1950 - Economic Theory and Applications > Definitions > Flashcards

Definitions Flashcards

1
Q

Commodity

A

A desirable good or service capable of being legally bought and sold. Not all desirable things are commodities, e.g. degrees and votes.

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2
Q

Wealth

A

The stock of commodities owned by a person at a given time. In practice, the sum of the market values of these commodities.

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3
Q

Income

A

The maximum flow of commodities which they can consume over a given period without reducing the value of their wealth. Almost always given as the market value of this flow of commodities.

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4
Q

Feasible Set

A

The set consisting of all the different collections of commodities which may be purchased by a given individual. It is a set of sets.

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5
Q

Budget Line

A

The bundles which cost exactly a person’s budget (no more, no less) form a subset of the feasible set which is called the budget line. This is also called the budget constraint. The slope of the budget line is the price ratio.

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6
Q

Budget Line Price Ratio

A

(Pf x Qf) + (Pb x Qb) = B(Budget)

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7
Q

Indifference Curve

A

An indifference curve through x is the set of all alternatives which are as good as, but no better than, x.
OR
An indifference curve through x is the set of all alternatives to x to which the consumer with x is indifferent. Slope is the Marginal Rate of Substitution (MRS).

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8
Q

Slope of Indifference Curve

A

MRS of b for a (where b is on the y axis)

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9
Q

Completeness Axiom

A

Consumers know what they like.

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10
Q

Transitivity Axiom

A

Preferences are internally consistent, i.e. if x is preferred to y and y is preferred to z, then x is preferred to z.

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11
Q

Rational Choice Axiom

A

Consumers are rational, consumers act in accordance to their preferences.

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12
Q

Non-Satiation Axiom

A

Consumers prefer more to less.

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13
Q

Continuity Axiom

A

Indifference curves are continuous lines.

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14
Q

Convexity Axiom

A

Indifference curves are convex to the origin.

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15
Q

Equilibria

A

No change in external/exogenous circumstances and is affected by one’s preferences, income and prices of commodities.

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16
Q

Normal Good

A

A good which a household buys more of (or at least the same quantity of) as its income rises over a given range. A fall in the price could lead to a rise or fall in supply.

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17
Q

Inferior Good

A

A good which a household buys less of as its income rises over a given range. A fall in price will always lead to a fall in supply.

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18
Q

Law of Demand

A

A rise in the price of a commodity will cause a household to purchase less of (or, at least no more of) that commodity.

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19
Q

Real Income

A

A household’s real income is constant when relative prices are changing if the household can just (but only just) stay on the same indifference curve as it was before the relative price change.

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20
Q

Substitution Effect

A

The substitution effect will always lead a consumer to purchase less of the now more expensive commodity and more of the now cheaper commodity; economists express this by saying that the substitution effect is always negative.

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21
Q

Income Effect

A

The income effect will sometimes lead a consumer to purchase less of the now more expensive commodity and sometimes more; economists express this by saying that the income effect may be positive or negative.

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22
Q

Giffen Good

A

A commodity for which the law of demand fails. All Giffen goods are inferior goods, but not all inferior goods are Giffen goods.

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23
Q

Demand Curve

A

A person or household’s demand curve for a commodity is a graph indicating their planned purchase quantity at any given price of that commodity. In a market, the aggregate quantity traders will be willing to buy at a given price.

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24
Q

Supply Curve

A

The graph indicating the planned sales quantity at any given price of a commodity. For a market, the aggregate quantity traders will be willing to sell at any given price.

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25
Q

Market

A

The set of all traders who may make offers to buy or sell a particular commodity to each other.

26
Q

Production

A

Any process that converts one set of commodities into a set of different commodities. Whether or not the two commodities are ‘different’ depends on whether or not consumers think they are different. The set of commodities you start with is called the set of inputs; what you end up with is the set of outputs. Inputs are often called ‘factors of production’ or just ‘factors’.

27
Q

Average Physical Product (APP)

A

The APP of an input at any given level of that input is the Total Physical Product divided by the quantity of that input.

28
Q

Marginal Physical Product (MPP)

A

The addition to total output brought about by employing one additional unit of the input with all other inputs fixed.

29
Q

X-inefficiency

A

When a producer fails to obtain the maximum output possible from a given set of inputs and a given technology.

30
Q

Technical Inefficiency

A

When a producer fails to obtain the maximum output possible from a given set of inputs because of his or her choice of producing methods (technology).

31
Q

Isoquant

A

The set of all input combinations which are capable of yielding at a maximum at a given output.

32
Q

Returns to Scale

A

The rate at which output increases as inputs are increased proportionally.

33
Q

Increasing Returns to Scale

A

Output more than doubles when all inputs are doubled.

34
Q

Constant Returns to Scale

A

Output doubles when all inputs are doubled.

35
Q

Decreasing Returns to Scale

A

Output less than doubles when all inputs are doubled.

36
Q

Isocost

A

A line which shows all the input combinations that cost a given amount.

37
Q

Economically Efficient

A

The economically efficient combinations of inputs for a given level of output and a given price ratio is that combination which minimises production costs.

38
Q

Average Cost

A

The total cost of production divided by the number of units of output.

39
Q

Marginal Cost

A

At an output level q is the addition to total costs brought about by producing one more unit of output.

40
Q

Marginal Revenue (MR)

A

At output level q, is the addition to Total Revenue brought about by producing and selling one more unit of output.

41
Q

Average Revenue (AR)

A

Total Revenue divided by quantity sold. Therefore, AR is the same as the price.

42
Q

Production Efficiency

A

When an economy is operating with production efficiency the output of any one commodity is at a maximum given the outputs of all other commodities and given inputs supplies and technology.

43
Q

Production Possibility Frontier (PPF)

A

(For the two output case). The PPF is a graph which shows the maximum attainable output of one commodity given the output of the other commodity. The slope of the PPF is the Real Marginal Opportunity Cost (RMOC).

44
Q

Slope of the PPF

A

Real Marginal Opportunity Cost (RMOC).

45
Q

Analysis of Exchange Ground Rules

A
  1. Two traders.
  2. They hold amounts of two different commodities.
  3. They hold no other wealth, in particular they hold no money.
46
Q

Contract Curve

A

The set of allocations of commodities to traders such that no reallocation can make every trader better off. The contract curve is a set of allocations of commodities between two traders at which trader’s indifference curves are tangential to each other.

47
Q

Comparative Advantage

A

A country has a comparative advantage in the production of commodity a if the RMOC of a in terms of (domestically produced) commodity b is lower than in the rest of the world.

48
Q

General Equilibrium (GE)

A

A state in which every market in the economy is in equilibrium simultaneously. It is a state where supply equals demand in all markets. This requires that all agents (households and firms) are in equilibrium.

49
Q

Marginal Revenue Product (MRP)

A

The MPP multiplied by the MR of the output. If the output is sold in a perfectly competitive market, MR is equal to the price and we can say the MRP equals the MP multiplied by the product price.

50
Q

Pareto Optimality

A

A state of an economy is Pareto-optimal if there is no other feasible state in which at least one person would be better off and no person would be worse off. The terms ‘Pareto-optimal’ and ‘Pareto-effecient’ are synonymous.

51
Q

Consumption Efficiency

A

Means the same as Pareto-optimality in exchange; it obtains when the allocation of outputs to households is such that no household can get onto a higher indifference curve without at least one other household being forced onto a lower indifference curve.

52
Q

Price Discrimination

A

When a firm charges more than one price for the same commodity it is said to price discriminate.

53
Q

Perfect Price Discrimination

A

When a monopolist charges a different price for each unit sold and that price is the maximum price the customer is prepared to pay.

54
Q

Cost

A

Any action or event which puts a person onto a lower indifference curve. If the cost is compensated she may, of course, achieve a higher indifference curve.

55
Q

Internal Production Costs

A

Those costs for which the producer pays adequate compensation to all those affected by the producer’s activities.

56
Q

External Production Costs

A

Those costs for which the producer pays no or inadequate compensation to those affected by the producer’s activities.

57
Q

Non-excludable Good

A

A good which when provided for one person must necessarily be provided for some others, e.g. a weapons systems deterring attack on a national state.

58
Q

Non-rival Good

A

A good which when consumed by one can also be consumed by some others, e.g. radio and TV.

59
Q

Pure Public Good

A

A good which is both non-excludable and non-rival in consumption.

60
Q

Merit Good

A

A good which is socially desirable on some criterion which is independent of the valuation places on it by the beneficiaries. It is something that is ‘good for you’.

61
Q

Demerit Good

A

A good which is socially undesirable on some criterion which is independent of the valuation placed on it by beneficiaries. It is something that is ‘bad for you’.

LUBS 1950 - Economic Theory and Applications (1 decks)

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