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BM1101 Business Economics > Key definitions > Flashcards

Key definitions Flashcards

1
Q

What is economics?

A

the study of how society manages its scarce resources.

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2
Q

microeconomics

A

the study of choices that individuals and businesses make, the way those choices interact in markets, and the influence of governments.

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3
Q

macroeconomics

A

the study of the performance of the national and global economies.
= economy-wide phenomena

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4
Q

tradeoff

A

an exchange—giving up one thing to get something else.
–> scarcity and choice

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5
Q

rational choice

A

one that compares costs and benefits and achieves the greatest benefit over cost for the person making the choice.

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6
Q

opportunity cost

A

the highest valued alternative that must be given up to get it.

the cost of the next best forgone alternative

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7
Q

marginal cost

A

The opportunity cost of pursuing an incremental increase in an activity

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8
Q

market

A

a group of buyers and sellers of a particular product.

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9
Q

Trade-off

A

The idea that, because of scarcity, producing more of one good or service means producing less of another good or service.

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10
Q

productive efficiency

A

producing a good or service at the lowest possible cost –> it comes about due to competition

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11
Q

allocative efficiency

A

when production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it. –> it arises due to voluntary exchange

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12
Q

voluntary exchange

A

A situation that occurs in markets when both the buyer and the seller of a product are made better off by the transaction.

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13
Q

Efficiency

A

the way in which society gets the most it can from its scarce resources

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14
Q

equity

A

the extent to which the benefits of outcomes are FAIRLY DISTRIBUTED among society’s members

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15
Q

market failure

A

when the market fails to allocate society’s resources efficiently.

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16
Q

causes of market failure

A

externalities, market power

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17
Q

Externalities

A

when the production or consumption of a good affects bystanders (e.g. pollution)
= the cost/benefit of one person’s decision on the well-being of a bystander

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18
Q

market power

A

a single buyer or seller has substantial influence on market price (e.g. monopoly)

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19
Q

scientific method

A

the dispassionate development and testing of theories about how the world works.

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20
Q

assumptions

A

simplify the complex world, make it easier to understand.

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21
Q

Model

A

a highly simplified representation of a more complicated reality.

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22
Q

positive statements

A

attempt to describe the world AS IT IS.
- can be confirmed or refuted

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23
Q

normative statements

A

attempt to prescribe how the world SHOULD be.
- cannot be confirmed or refuted

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24
Q

PPF

A

Production Possibilities Frontier -
a graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology.

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25
Q

production efficiency (PPF)

A

We achieve production efficiency if we cannot produce more of one good without producing less of some other good.
- All points ON the PPF (line/curve) are efficient.

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26
Q

competitive market

A

a market that has many buyers and many sellers so no single buyer or seller can influence the price.

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27
Q

money price

A

the amount of money needed to buy it.

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28
Q

relative price

A

the ratio of its money price to the money price of the next best alternative good—is its opportunity cost.

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29
Q

quantity demanded

A

the amount that consumers plan to buy during a particular time period, and at a particular price.

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30
Q

The Law of Demand

A

Other things remaining the same (ceteris paribus), the higher the price of a good, the smaller is the quantity demanded; and the lower the price of a good, the larger is the quantity demanded.
–> the quanity demanded of a good falls when price rises

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31
Q

demand schedule

A

shows the quanitity demanded at each price

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32
Q

demand curve

A

graph that shows the relationship between the quantity demanded of a good and its price when all other influences on consumers’ planned purchases remain the same.

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33
Q

normal goods (DEMAND SHIFTERS INCOME)

A

Goods for which the demand increases as income rises and decreases as income falls.

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34
Q

inferior goods (DEMAND SHIFTERS INCOME)

A

Goods for which the demand increases as income falls and decreases as income rises.
e.g. second-hand clothes

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35
Q

substitutes (DEMAND SHIFTERS - Price of related goods)

A

Goods and services that can be used for the same purpose.

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36
Q

Complements (DEMAND SHIFTERS - Price of related goods)

A

Goods and services that are used together.

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37
Q

Demand shifters - tastes

A

If consumers’ tastes change, they may buy more or less of the product.

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38
Q

Demand shifters - expectations

A

Consumers decide which products to buy, but also when to buy them.
* Future products are substitutes for current products.
* An expected increase in the price tomorrow increases demand today.
* An expected decrease in the price tomorrow decreases demand today.

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39
Q

Demand shifters - number of buyers

A

Increases in the number of people buying something will increase the amount demanded.

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40
Q

quantity supplied

A

the amount that producers plan to sell during a given time period at a particular price.

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41
Q

The Law of Supply

A

Other things remaining the same, the higher the price of a good, the greater is the quantity supplied; and the lower the price of a good, the smaller is the quantity supplied.

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42
Q

supply curve

A

shows the relationship between the quantity supplied of a good and its price when all other influences on producers’ planned sales remain the same.

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43
Q

Supply shifters - input prices

A
  • Inputs are things used in the production of a good or service.
  • An increase in the price of an input decreases the profitability of selling the good, causing a decrease in supply.
  • A decrease in the price of an input increases the profitability of selling the ood, causing an increase in supply.
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44
Q

Supply shifters - tech

A

A firm may experience a positive or negative change in its ability to produce a given level of output with a given quantity of inputs. We call this a technological change.

45
Q

Supply shifters - expectations

A

If a firm anticipates that the price of its product will be higher in the future, it might decrease its supply today in order to increase it in the future.

46
Q

Supply shifters - number of sellers

A

Fewer firms→ supply decreases.
- The larger the number of suppliers of a good, the greater is the supply of the good. An increase in the number of suppliers shifts the supply curve rightward.

47
Q

what change affects quantity supplied

A

a change in the price of a good

48
Q

what changes affects the supply

A
  • costs
  • input prices
  • tech
  • prices of related goods/services
49
Q

surplus

A

When price > equilibrium price, then quantity supplied > quantity demanded.

50
Q

shortage

A

When price < equilibrium price, then quantity supplied < quantity demanded.

51
Q

welfare economics

A

the study of how the allocation of resources affects economic well-being.

52
Q

Allocative efficiency

A

a resource allocation where the value of the output by sellers matches the value placed on that output by buyers.

53
Q

What is consumer surplus?

A

buyer’s willingness to pay - the actual price paid for the good

54
Q

What is the effect of a lower price on consumer surplus?

A

raises consumer surplus - they were willing to pay more than they acc bought it for

55
Q

producer surplus

A

the amount a seller is paid for a good minus the seller’s cost.

56
Q

using the supply curve to measure producer surplus

A

The area below the price and above the supply curve measures the producer surplus in a market.

57
Q

What is the effect of a higher price for producer surplus

A

raises producer surplus

58
Q

How can economic well-being be measured?

A

by total surplus = consumer surplus + producer surplus

59
Q

price ceiling

A

A legal maximum on the price at which a good can be sold.

60
Q

price floor

A

a legal minimum on the price at which a good can be sold

61
Q

when is a price ceiling NOT binding?

A

if price is set ABOVE equilibrium price

62
Q

what does a price ceiling below equilbrium price mean?

A

binding; leads to a shortage bc Qd > Qs

63
Q

when is a price floor NOT binding?

A

if price is set BELOW equibrium price

64
Q

what does a price floor above equilbrium price mean?

A

it is binding - creates surplus - Qs > Qd

65
Q

direct tax

A

imposed on income and wealth

66
Q

indirect tax

A

levied on sales of goods and services

67
Q

specific tax

A

set amount per unit of expenditure

68
Q

ad valorem

A

tax expressed as a %

69
Q

Tax incidence

A

the manner in which the burden of a tax is shared among participants in a market.

70
Q

What is the effect of a specific tax on market outcomes?

A
  • Supply curve shifts up by the amount of the tax.
  • Quantity sold falls.
  • both buyers & sellers share the burden as buyers pay more and suppliers receive less
71
Q

Price elasticity

A

how much the quantity demanded responds to change in the price

72
Q

What determines the incidence?

A

price elasticity
- if demand is inelastic => consumer burden > producer burden
- if demand is price elastic => producer burden > consumer burden

73
Q

What is a negative externality?

A

the COSTS imposed on a third party of a decision –> impact of the decision has adverse effects on a third party

costs > benefits

74
Q

Positive externality

A

the benefits to a third party of a decision - impact is beneficial

75
Q

How to achieve a socially optimal output?

A

The government can internalize an externality by imposing a tax on the producer to reduce the equilibrium quantity to the socially desirable quantity.

76
Q

Pigovian taxes

A

taxes imposed to correct the effects of negative externalities

77
Q

Absolute advantage

A

Where a producer can produce a good using fewer factor inputs than another producer –> The producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good.

78
Q

Comparative advantage

A

the comparison among producers according to their opportunity cost –> a producer who has the smaller opportunity cost of producing a good is said to have a comparative advantage in producing that good.

79
Q

Imports

A

goods produced abroad and sold domestically.
- money flows OUT of the country

80
Q

Exports

A

goods produced domestically and sold abroad.
- money flows INTO the country

81
Q

World price

A

the price that prevails in the world market for that good.

82
Q

What determines if a country is an importer of a good?

A

if the domestic price > world price –> NO comparative advantage

83
Q

What determines if a country is an exporter of a good?

A

if domestic price < world price –> YES comparative advantage

84
Q

Who benefits from trade? Who does trade harm? Do the gains outweigh the losses?

A

exporting country benefits

trade benefits domestic producers; domestic consumers are worse off

but overall yes, gains are that trade raises the economic well-being of the nation as a whole.

85
Q

If policymakers restrict imports, who benefits?

A

producers
–> importing country yields: Domestic producers of the good are worse off, and domestic consumers of the good are better off.

86
Q

What is a tariff?

A

a tax on goods produced abroad and sold domestically ( - tax on imports)

87
Q

The effects of a tariff on the economy

A

domestic sellers are better off and domestic buyers are worse off
–> The tariff reduces the domestic quantity demanded
–> It raises the domestic quantity supplied

88
Q

Deadweight loss

A

a loss in the overall market because of the taxes (so for both supply & demand)

89
Q

Marginal product

A

the increase in output that arises from an additional unit of that input.

90
Q

Diminishing marginal product

A

the marginal product of an input declines as the quantity of the input increases.

91
Q

Fixed costs

A

costs that do not vary with the quantity of output produced.

92
Q

Variable costs

A

costs that do vary with the quantity of output produced.

93
Q

Average cost

A

the cost of each typical unit of product.

94
Q

Marginal cost

A

measures the increase in total cost that arises from an extra unit of production.

95
Q

Total revenue =

A

selling price x quantity sold

TR = P x Q

96
Q

Marginal revenue

A

the change in total revenue from an additional unit sold.

97
Q

average revenue

A

tells us how much revenue a firm receives for the typical unit sold.

98
Q

Normal profit

A

the amount required to keep the factors of production in their current use

99
Q

Abnormal profit

A

the profit over and above normal profit.

100
Q

What is a shutdown?

A

a short-run decision not to produce anything during a specific period of time because of current market conditions.

101
Q

What is an Exit?

A

a long-run decision to leave the market

102
Q

Imperfect competition

A

where firms differentiate their product in some way and so can have some influence over price.

103
Q

Market share

A

the proportion of total sales in a market accounted for by a particular firm.

104
Q

Market share

A

the proportion of total sales in a market accounted for by a particular firm.

105
Q

Market power

A

where a firm is able to raise the price of its product and not lose all its sales to rivals.

106
Q

Monopoly

A

a firm that is the sole seller of a product without close substitutes.

107
Q

Natural monopoly

A

(e.g. an industry) - when a single firm can supply a good or service to an entire market at a smaller cost than could 2+ firms.

108
Q

Price discrimination

A

selling the same good at different prices to different customers, even though the costs for producing for the two customers are the same.

109
Q

Arbitrage

A

The process of buying a good in one market at a low price and then selling it in another market at a higher price.

BM1101 Business Economics (6 decks)

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