Exam Board Micro Definitions Flashcards
SSV
What is a positive statement?
A statement that does not include a value judgement and can be tested against the facts or evidence.
What is a normative statement?
A statement that includes a value judgement and cannot be refuted just by looking at data or evidence.
What is a value judgement?
A view about what is right or wrong, good or bad in a moral sense. Statements that include value judgements often, but not always, contain the words ‘should’ or ‘ought’.
What is economic activity?
The production, consumption, exchange and distribution of goods and services.
What are economic resources (factors of production)?
The inputs into the production process that are needed to produce the goods and services that satisfy people’s wants. They are usually classified as land, labour, capital and enterprise.
What is land in the context of factors of production?
The factor of production that includes all the natural resources that are available on the earth. It includes the land and sea.
What is capital in the context of factors of production?
The human-made factor of production. Examples of capital include machines, tools, lorries and buildings.
What is labour in the context of factors of production?
The human resource. The contribution made by people to the production of goods and services.
What is an entrepreneur?
The person or group of people who organise the other economic resources to allow goods and services to be produced.
What is enterprise?
Enterprise involves making decisions and taking risks.
What is a scarce resource?
A factor of production that is limited in supply. There are not enough available to satisfy people’s needs and wants.
What is scarcity?
The fundamental economic problem that results from limited resources and unlimited wants. It means that choices have to be made which have an opportunity cost.
What is opportunity cost?
The next best alternative foregone when a choice is made.
What is a production possibility diagram?
Shows the quantities of two goods or services that can be produced with the available resources, given the current state of technology.
What is the production possibility boundary (PPB)?
The PPB is also known as the production possibility curve (PPC) and the production possibility frontier (PPF). It shows the various quantities of two goods or services that can be produced, with the current state of technology, when all the available resources are fully employed.
What is resource allocation?
How the available factors of production are used to produce different goods and services. The allocation of resources involves determining what is produced, how it is produced and for whom it is produced.
What is rational economic decision making?
Using all the available information to select the best option to maximise the welfare of the decision maker. A rational consumer chooses to buy the goods and services that, given their limited income, will maximise their total utility.
What is utility?
The satisfaction that is derived from consuming a good or service.
What is marginal utility?
The change in total utility that results from the consumption of one more, or one fewer, goods or services.
What is the hypothesis of diminishing marginal utility?
The proposition that as more of a product is consumed, the additional satisfaction gained from each extra unit declines.
What is imperfect information?
When an economic agent does not have all the information needed to make a rational decision, or the information is distorted in some way.
What is asymmetric information?
A type of imperfect information where one party to an economic transaction has more information than the other party.
What is behavioural economics?
A branch of economics that includes elements of psychology to improve our understanding of how people’s decision making is influenced by biases and emotional factors.
What is bounded rationality?
The idea that human limitations mean that people’s decision making is not completely rational. Bounded rationality means that when an individual makes a decision, they choose an option that is satisfactory rather than optimal.
What is bounded self-control?
The idea that people do not have sufficient willpower or self-discipline to resist choices that may be tempting but are not in their self-interest.
What are rules of thumb?
Mental shortcuts, based on experience, that enable individuals to make decisions more quickly and easily.
What is anchoring?
The idea that when making decisions, people rely too heavily on one particular piece of information, the anchor. The anchor is often the first piece of information they encounter.
What is availability bias?
When people’s decision making is unduly influenced by recent events or how easily an event comes to mind.
What are social norms?
Behaviours that are consistent with what is generally considered acceptable by society at the present time.
What is choice architecture?
The way or framework in which choices are presented to people.
What is a nudge?
Something that encourages a particular decision or behaviour without removing freedom of choice.
What is a default choice?
An option that has been pre-selected for an individual but the individual is able to select a different option if they want to.
What is restricted choice?
Where the number of choices made available to an individual is limited. This type of choice architecture is often adopted when there is a large number of choices available which makes it hard for individuals to decide which is the best option.
What is mandated choice?
A form of choice architecture where the individual must make a decision. Mandated choices are usually required by law.
What is a demand curve?
The relationship between the price and quantity demanded of a good or service, in a given period of time, when other things that affect demand are held constant.
What is price elasticity of demand?
A measure of the extent to which the quantity demanded of a product changes in response to a change in the price of the product.
What is income elasticity of demand?
A measure of the extent to which the quantity demanded of a product changes in response to a change in income.
What is cross elasticity of demand?
A measure of the extent to which the quantity demanded of a product changes in response to a change in the price of a different product.
What is a normal good?
A product where there is a positive relationship between income and the quantity demanded of the product, eg a rise in income leads to a rise in the quantity demanded.
What is an inferior good?
A product where there is an inverse relationship between income and the quantity demanded of the product, eg a rise in income leads to a fall in the quantity demanded.
What is a supply curve?
The relationship between the price and quantity supplied of a good or service, in a given period of time, when other things that affect supply are held constant.
What is price elasticity of supply?
A measure of the extent to which the quantity supplied of a product changes in response to a change in the price of the product.
What is equilibrium market price?
The price at which the quantity demanded equals the quantity supplied and there is no tendency for the price to change.
What is disequilibrium price?
A price at which there is either excess demand, and a tendency for the price to rise, or there is excess supply, and a tendency for the price to fall.
What is excess demand?
The amount by which the quantity demanded exceeds the quantity supplied at the current price.
What is excess supply?
The amount by which the quantity supplied exceeds the quantity demanded at the current price.
What is joint demand?
When two products are demanded together so that the demand for one product is directly related to the demand for the other product. Complementary goods such as printers and printer cartridges are in joint demand.
What is competitive demand?
When the demand for one product increases the demand for another product decreases. Substitute goods such as butter and margarine are in competitive demand.
What is composite demand?
When a product has more than one use so that an increase in the demand for one use leads to a fall in the supply of the product that is available to use elsewhere. For example, milk is used to produce cream and cheese.
What is derived demand?
When the demand for a product, or factor of production, is determined by the demand for a different product. For example, the demand for steel is derived from the demand for cars, and a number of other products.
What is joint supply?
When the output of one product also results in the output of a different product. For example, sheep farming can lead to the supply of both meat and wool.
What is production?
The process of using factors of production to create goods and services.
What is productivity?
A measure of how much a factor of production can produce in a given period of time. For example, the productivity of land might be measured by output per hectare per year. It is a measure of efficiency.
What is labour productivity?
A measure of how much a worker can produce in a given period of time. For example, output per person per hour.
What is specialisation?
Where firms, regions, countries or factors of production concentrate on producing a particular good or service, or carrying out a particular task.
What is division of labour?
When the production of a good is broken down into many separate tasks and each worker performs one task, or a narrow range of tasks, as part of the production process.
What is short run?
The time period when there is at least one fixed factor of production.
What is long run?
The time period when all factors of production are variable.
What is the law of diminishing returns?
The law states that as more of a variable factor of production is used in combination with a fixed factor of production, both the marginal and average returns to the variable factor of production will initially increase but will eventually decrease.
What are returns?
The amount produced, ie the output of a good or service.
What are marginal returns?
The change in total output that results from employing one more unit of a variable factor of production when the amount employed of all other factors of production is unchanged.
What are average returns?
Average returns to a variable factor of production is calculated by dividing total output by the number of units of the variable factor that are employed.
What are total returns?
Total output.
What are returns to scale?
The effect on total output when all factors of production are changed. It relates to the long run when all factors of production are variable.
What are increasing returns to scale?
When a given percentage increase in all factor inputs leads to a greater percentage increase in output.
What are constant returns to scale?
When a given percentage increase in all factor inputs leads to the same percentage increase in output.
What are decreasing returns to scale?
When a given percentage increase in all factor inputs leads to a smaller percentage increase in output.
What are fixed costs?
Costs that do not change when output changes.
What are variable costs?
Costs that change when output changes.
What is marginal cost?
The change in total cost when one more or one fewer unit of output is produced.
What is average cost?
Total cost divided by output.
What is total cost?
Total fixed cost plus total variable cost.
What are internal economies of scale?
When the growth of a firm results in the firm’s long-run average cost falling.
What are external economies of scale?
When the growth of an industry leads to lower average cost for firms in that industry.
What are diseconomies of scale?
When the growth of a firm results in the firm’s long-run average cost increasing.
What is the long-run average cost curve (LRAC)?
Shows the minimum average costs of producing any given level of output when all factors of production are variable but technology has not changed.
What is the minimum efficient scale of production?
The lowest level of output at which a firm’s long-run average cost is minimised.
What is total revenue?
The total amount of money a firm receives from selling its output. It is usually calculated by multiplying the price of the product by the quantity sold.
What is marginal revenue?
The change in total revenue when one more or one fewer unit of output is sold.
What is average revenue?
Total revenue divided by the quantity sold.
What is profit?
The difference between a firm’s total revenue and total cost (TR - TC). The firm makes a profit when TR > TC. It is the reward for the factor of production enterprise.
What is normal profit?
The minimum amount of profit that is required to keep the entrepreneur in business in the long run. It is the opportunity cost of the entrepreneur. If the cost of enterprise is included as one of the firm’s costs of production, normal profit is earned when total revenue equals total cost.
What is Profit?
The difference between a firm’s total revenue and total cost (TR - TC). The firm makes a profit when TR > TC. It is the reward for the factor of production enterprise.
What is Normal profit?
The minimum amount of profit that is required to keep the entrepreneur in business in the long run. It is the opportunity cost of the entrepreneur. Normal profit is earned when total revenue equals total cost.
What is Abnormal profit (supernormal profit)?
When total profit is greater than normal profit.
What is Subnormal profit?
When total profit is less than normal profit.
What is Technological change?
The discovery and use of new and improved methods of producing goods and services. The introduction of new, more efficient technologies shifts the LRAC downwards.
What is Invention?
The discovery of something new, such as a new product, process or method of production.
What is Innovation?
The process of introducing and developing a new product, service or method of production.
What is Market structure?
The classification of an industry, or market, in respect of its key characteristics including: the number of firms, the nature of the product and ease of entry.
Divorce of ownership from control
When the people who own a business are not the same set of people who manage, or control, the business.
Satisficing
A decision-making strategy where people/managers aim to achieve an acceptable, or satisfactory, outcome rather than the optimal outcome.
For example, managers might aim to achieve a minimum target level of profit rather than to maximise profit.
Market share
The percentage of total sales in a given market that is accounted for by a particular firm or product.
Perfect competition
A market structure that comprises a large number of small firms selling a homogeneous (identical) product to a large number of buyers, none of whom are able to influence the market price. There is perfect knowledge and freedom of entry into the market.
Homogeneous products
Products that are identical to each other, they are perfect substitutes.
Price taker
A firm that is unable to influence the price of the product it sells. When a firm is a price taker, the price is usually determined by market forces, ie the interaction of demand and supply.
Monopolistic competition
A market structure that comprises a large number of small firms selling differentiated products to a large number of buyers. There is freedom of entry into the market.
Differentiated products
Products that are similar but not identical to each other. They are close but not perfect substitutes.
Products can, for example, be differentiated by the use of brand names, advertising, design, colour and after-sales service. These are types of non-price competition that firms use to differentiate their products and increase their monopoly power.
Price maker
A firm that is able to set the price of the product it sells.
Oligopoly
Oligopoly is a market structure that is often defined as ‘competition amongst the few’. It is not a clearly defined market structure, but a few large firms dominate the market and compete with each other. The market may also contain some small and medium-sized firms. Firms in oligopolistic markets usually produce differentiated products and there are barriers to entry, although the extent to which entry is restricted varies.
Concentration ratio
A measure of the combined market share of the largest firms in an industry, usually expressed as a percentage.
For example, a three-firm concentration ratio could be calculated as follows: combined sales of the three largest firms ÷ total sales in the market x 100.
Collusion
Where rival firms work together for their mutual benefit often to the detriment of consumers.
Collusive oligopoly
Where some or all of the large firms in the market work together to increase their monopoly power.
Competitive (non-collusive) oligopoly
Where the firms in the market act individually in their self-interest and use various means to compete with each other.
Kinked demand curve model
A model of oligopolistic behavior that assumes if one firm reduces its price others will follow, but if a firm raises its price other firms won’t follow. Explains price stability in oligopolies.
Cartel
A formal agreement between firms to fix prices, restrict output, or divide markets to increase monopoly power.
Price leadership
When one dominant firm sets prices that other firms in the market follow.
Price agreements
When firms cooperate to fix prices for different products/customers.
Price wars
When firms aggressively cut prices to gain market share, often forcing weaker firms out.
Barriers to entry
Factors that make it difficult for new firms to enter a market.
Monopoly
When a single firm supplies 100% of a market.
Monopoly power
A firm’s ability to influence prices (price maker rather than price taker).
Price discrimination
Charging different prices to different consumers for the same product (not due to cost differences).
Creative destruction
The replacement of existing products/firms with new ones due to technological change.
Contestable market
A market with few/no barriers to entry/exit or sunk costs.
Sunk cost
Costs that can’t be recovered if a firm leaves a market (creates exit barriers).
Hit-and-run competition
When firms temporarily enter a market to exploit abnormal profits, then exit when profits normalize.
Static efficiency
Optimal allocation of existing resources at a point in time (productive + allocative efficiency).
Dynamic efficiency
Improving efficiency over time through investment, innovation and better production methods.
Productive efficiency
Producing at lowest possible cost (minimum point on AC curve).
Allocative efficiency
Producing what consumers want (P=MC).
Consumer surplus
Difference between what consumers are willing to pay and what they actually pay.
Producer surplus
Difference between the price received and the minimum price firms would accept.
Deadweight loss
Loss of economic efficiency when equilibrium isn’t achieved.
Demand curve for labor
Relationship between wage rate and quantity of workers demanded.
Marginal physical product of labor
Additional output from employing one more worker.
Marginal revenue product of labor
Additional revenue from output produced by one more worker.
Elasticity of demand for labor
Responsiveness of labor demand to wage changes.
Supply curve for labor
Relationship between wage rate and workers willing to work.
Perfectly competitive labor market
Many small firms/workers, homogeneous labor, perfect information.
Imperfectly competitive labor market
With monopsony power, trade unions, or imperfect information.
Monopsony
Single buyer of a product/factor of production.
Trade union
Worker organization that protects members’ rights/interests.
National minimum wage
Legal minimum wage rate.
Wage discrimination
Paying different wages for same work (not based on productivity).
Income
Flow of money received over time (earned/unearned).
Wealth
Stock of assets owned at a point in time.
Equality and inequality
Evenness of income/wealth distribution (measurable via Gini coefficient).
Equity
Fairness/justice (normative concept).
Lorenz curve
Graphical representation of income/wealth distribution.
Gini coefficient
Numerical measure of inequality (0=perfect equality, 1=perfect inequality).
Absolute poverty
Insufficient income for basic needs.
Relative poverty
Income below society’s general standard (typically <60% median income).
Rationing function of price mechanism
Prices adjust to balance demand/supply based on ability to pay.
Incentive function of price mechanism
Price changes motivate producers to adjust supply.
Signaling function of price mechanism
Price changes convey market information to economic agents.
Market failure
Misallocation of resources in unregulated markets.
Complete market failure
Missing market for a needed product.
Partial market failure
Market exists but supplies wrong quantity.
Public good
Non-rival and non-excludable product.
Private good
Rival and excludable product.
Quasi-public good
Has some but not all public good characteristics.
Non-excludable
Cannot prevent consumption.
Non-rival
One person’s consumption doesn’t reduce availability.
Free rider
Consumes without paying (due to non-excludability).
Tragedy of the commons
Overuse/depletion of shared resources.
Externality
Effects on third parties not reflected in market prices.
Negative externality
Social cost > private cost, or private benefit > social benefit.
Positive externality
Social cost < private cost, or social benefit > private benefit.
Social cost
Private cost + external cost.
Social benefit
Private benefit + external benefit.
Property rights
Legal authority over resource use.
Merit good
Underconsumed product society values.
Demerit good
Overconsumed product society disapproves.
Immobility of factors of production
Barriers to geographic/occupational mobility.
Competition policy
Government measures to control firms and protect competition.
Public ownership
Government-owned firms/industries.
Privatization
Transfer of state assets to private sector.
Regulation
Government rules limiting firm/individual behavior.
Deregulation
Removal of restrictive rules.
Regulatory capture
When regulators favor firms over public interest.
Pollution permits
Tradable licenses allowing set pollution levels.
Subsidy
Producer payment to reduce costs/increase supply.
Price control
Government-set maximum/minimum prices.
Government failure
When intervention worsens resource allocation.
Unintended consequences
Unexpected outcomes from policies/actions.
