Key Terms Flashcards
Allocative efficiency
Occurs when the available resources are used to produce goods and services that best match people’s needs
Allocative function of prices
Changing relative prices allocate scarce resources away from markets exhibiting excess supply and into markets in which there is excess demand
Artificial barrier to entry
A barrier to market entry which is man made
Average revenue
The total revenue divided by output. In a single product firm, average revenue equals the price of the product
Capital good
A good which is used in the production of other goods or services. Also known as a producer good
Capital productivity
Output per unit of capital
Collusion
Co-operation between firms, for example to fix prices. Some forms of collusion may be in the public interest, e.g labour training schemes
Competing supply
When raw materials are used to produce one good they can’t be used to produce another good
Competitive market
A market in which the large number of buyers and sellers possess good market information and can easily enter or leave the market. A competitive market is one in which firms strive to outdo their rivals, but it does not necessarily meet all the conditions of perfect competition.
Complementary good
A good in joint demand, or a good which is demanded at the sane time as the other good
Composite demand
Demand for a good which has more than one use
Concentrated market
A market containing very few firms in the extreme only one firm
Concentration ratio
A ratio which indicates the total market share of number of leading firms in a market, or the output of these firms as a percentage of total market output
Condition of demand
A determinant of demand, other than the goods own price, that fixes the position of the supply curve
Conditions of supply
Determinants of supply, other than the goods own price, that fixes the position of the supply curve
Consumer good
A good which is consumed by individuals or households to satisfy their needs or wants
Consumer sovereignty
Through exercising their spending power, consumers collectively determine what is produced in a market. Consumer sovereignty is strongest in a perfectly competitive market
Consumption externality
An externality generated in the course of consuming a good or service
Cross elasticity of demand
Measures the extent to which demand for a good changes in response to a change in the price of another good; it is calculated by dividing the percentage change in quantity demanded by the percentage change in the price of another good
Decrease in demand
A leftward shift in the demand curve
Decrease in supply
A leftward shift in the supply curve
Demand
The quantity of a good or service that consumers are willing and able to buy at given prices in a given period of time. For economists, demand is always effective demand
Demerit good
A good, for which social costs of consumption exceed the private cost e.g tobacco
Derived demand
Demand for a good which is an input into the production of another good
Diseconomy of scale
As output increases long run average cost rises
Disequilibrium
When there is excess supply or excess demand
Distribution of income and wealth
The way in which income and wealth are divided among the population
Division of labour
Specialisation, different workers perform different tasks in the course of producing a good or service
Economic growth
The increase in the potential level of real output the economy can produce over a period of time
Economic welfare
The economic well-being of an individual, a group within society, or an economy
Economy of scale
As output increases long run average cost falls
Effective demand
The desire for a good or service backed by an ability to pay
Elasticity
The proportionate responsiveness of a second variable to an initial proportionate change in the first variable
Entry barrier
Makes it difficult or impossible for new firms to enter a market
Equilibrium
A state of rest or balance between opposing forces
Equilibrium price
The price at which planned demand for a good or service exactly equals planned supply
Equity
Fairness or justness
Excess demand
When consumers wish to buy more than firms wish to sell, with the price below the equilibrium price
Excess supply
When firms wish to sell more than consumers wish to buy, with the price above the equilibrium price
Exit barrier
Makes it difficult or impossible for firms to leave a market
External economy of scale
Cost saving resulting from the growth of the industry or market of which the firm is a part
Externality
A public good (external benefit) or a public bad (external cost) which is dumped on third parties outside the market
Factors of production
Inputs into the production process, such as land, labour, capital and enterprise
Fixed cost
A cost of production which in the short run doesn’t change with output
Fundamental economic problem
How to best make decisions about the allocation of scarce resources among competing uses so as to improve and maximise human happiness and welfare
Geographical immobility of labour
When workers find it difficult to move to other places for jobs
Government failure
When government intervention reduces economic welfare leading to an allocation of resources that is worse than the free market outcome
Immobility of labour
The inability of labour to move from one job to another
Imperfect competition
Any market structure lying between the extremes of perfect completion and pure monopoly
Incentive function of prices
Prices create incentives for people to alter their economic behaviour
Income elasticity of demand
Measures the extent to which demand for a good changes in response to a change in income. Calculated by dividing the perfect change in quantity demanded by the the percentage change in income
Increase in demand
A rightward shift if the demand curve
Increase in supply
A rightward shift in the supply curve
Inequity
Unfairness
Inferior good
A good for which demand decreases as income rises and demand increases as income falls
Innovation
Converts the results of invention into marketable products or services
Internal economy of scale
Cost saving resulting from the growth of the firm itself
Joint supply
When one good is produced, another good is also produced from the same raw materials
Limit pricing
Reducing the price of s good to just above average cost to deter the entry of new firms into the market. Prices are set at levels which are likely to make it unprofitable for potential entrants who might consider coming into the market
Long run
The time period in which no factors of production are fixed and can be varied
Market disequilibrium
Exists at any price other than the equilibrium price, there is either excess demand or supply
Market equilibrium
When planned demand equals planned supply in the market
Market failure
When the market mechanism leads to a misallocation of resources in the economy
Market share maximisation
When a firm maximises it’s percentage share of the market in which it sells its product
Market structure
The organisation of a market in terms of the number of firms in the market and ways in which the behave
Merit good
When consumed it leads to benefits which the third party benefits from.
Missing market
A situation in which there is no market because the functions of prices have broken down
Monopoly power
The power of a firm to act as a price maker rather than as s price taker
Natural monopoly
When a country or firm has complete control of a natural resource.
Negative externality
Where the social cost is greater than private cost
Normal good
A good for which demand increases as income increases
Normative statement
A statement that includes s value judgment and can’t be refuted just by looking st the evidence
Oligopoly
A market dominated by a few firms
Opportunity cost
The cost of giving up the next best alternative
Patent
A man made barrier to market entry caused by government legislation protecting the right if s firm to be the sole producer of a patented good
Perfect competition
A market which has;
•a large number of buyers and sellers
•perfect market information
•the ability to buy or sell as much as is desired at the market price
•the inability of an individual buyer or seller to influence the market price
•a uniform or homogeneous product
•no barriers to entry or exit in the long term
Positive externality
Where the social benefit is greater than the private benefit
Positive statement
A statement of fact that can be tested
Predatory pricing
Temporarily reducing the price of a good to below average cost to drive smaller firms or new market entrants out of the market
Price ceiling
A price above which it is illegal to trade. Price ceilings can distort markets by creating excess demand
Price competition
Reducing the price of a good or service to gain sales by making it more attractive for consumers
Price elasticity of demand
Measures the extent to which the demand for s good changes in response to a change in the price of that good
Price elasticity of supply
Measures the extent to which the supply of a good changes in response to a change in the prude of that good
Price floor
A price below which it is illegal to trade. Price floors can distort markets by creating excess supply
Price maker
A firm possessing the power to set the price within the market
Price taker
A firm which passively accepts the ruling market price set by market conditions outside its control
Private good
A good, such as an orange, that is excludable and rival
Producer sovereignty
Producers or firms in a market determine what is produced and what prices are charged
Product differentiation
Making a product different from other products through product design, the method of producing the product, or through its functionality
Production externality
An externality generated in the course of producing a good or service
Production possibility frontier
A curve depicting the various combinations of two products that can be produced when all the available resources re fully and efficiently employed
Productive efficiency
When it is impossible to produce more of one good without producing less of another
Productivity gap
The difference between labour productivity in the uk and in other developed countries
Profit maximisation
When a firms total sale revenue revenue is the furthest above the total cost of production
Public good
A good that is non excludable and non rivalrous such as a radio programme
Quantity setter
A firm chooses the quantity of a good to sell rather than a price
Quasi public good
A good which is not fully non rivalrous and non excludable
Rationing function of prices
Riding the prices ration demand for a product
Regulation
Involves the imposition of rules, controls and constraints, which restrict freedom of economic action in the market place
Sales maximisation
Occurs when the sale revenue is maximised
Saturation advertising
Flooding the market with information and persuasion about a firms product, this is a man made barrier to entry as it makes it hard for small firms to compete
Short run
The time period in which at least one factor of production is fixed and can’t be varied
Short run production
Occurs when a firm adds variable factors of production to fixed factors of production
Signalling function of prices
Prices provide information to buyers and sellers
Social benefit
The total benefit of an activity, social benefit=private benefit+external benefit
Social cost
The total cost of an activity, social cost=private cost+external cost
Subsidy
A payment made by the government usually to producers for each unit of subsidised good produced
Substitute good
A good in competing demand, which can be used in place of the other good
Supply
The quantity of a good or service that firms are willing and able to sell at given prices and in a given period of time
Tax
A compulsory levy imposed by the government to pay for its activities.
Technical economy of scale
A cost saving generated through changes to the “productive process” as the scale of production and the level of output increase
Total cost
The whole cost of producing a particular level of output
Total revenue
The money a firm receives from selling its output, calculated by multiplying the price by the quantity sold
Trade
The buying and selling of goods and services
Unemployment
The number of people that are willing and able to work that are not employed
Variable cost
Cost of production which changes with the amount that is produced, even in the short run
