Key Words Micro Flashcards
Adverse selection
A situation in which a person at risk is more likely to take out insurance
Allocative efficiency
Achieved when consumer satisfaction is maximised
Asymmetric information
A situation in which some participants in a market have better information about market conditions than others
Average total cost(ATC)
Total cost divided by the quantity produced
Buffer stock
A scheme intended to stabilise the price of a commodity by buying excess supply in periods when supply is high, and selling when supply is low
Capitalism
A system of production in which there is a private ownership of productive resources, and individuals are free to pursue their objectives with minimal interference from government
Centrally planned economy
Decisions on resource allocation are guided by the state
Ceteris paribus
A Latin phrase meaning ‘other things being equal’; it is used in economics when we focus on changes in one variable while holding other influences constant
Comparative static analysis
Examines the effect on the equilibrium of a change in the external conditions affecting a market
Competitive demand
Demand for goods that are in competition with each other
Competitive market
A market in which individual firms cannot influence the price of the good or service they are selling because of competition from other firms
Competitive supply
A situation in which a firm can use its factors of production to produce alternative products
Complements
Two goods are said to be complements if people tend to consume them jointly, so that an increase in the price of one good causes the demand for the other good to fall
Composite demand
Demand for a good that has multiple uses
Composite supply
Where a product produced by a firm serves more than one market
Consumer surplus
The value that consumers gain from consuming a good or service over and above the price paid
Consumption externality
An externality that affects the consumption side of a market, which may be either positive or negative
Cost efficiency
The appropriate combination of inputs of factors of production, given the relative prices of those factors
Cross elasticity of demand (XED)
A measure of the sensitivity of a quantity demanded of a good or service to a change in price of some other good or service
Demand
The quantity of a good or service that consumers are willing and able to buy at any possible price in a given period
Demand curve
A graph showing how much of a good will be demanded by consumers at any given price
Demerit goods
A good that brings less benefit to consumers than they expect, such that too much will be consumed by individuals in a free market
Derived demand
Demand for a factor of production or a good which derives not from the factor or the goods itself, but from the goods it produces
Division of labour
A process whereby the production procedure is broken down into a sequence of stages and workers are assigned to particular stages
Economic efficiency
A situation where both productive efficiency and allocative efficiency have been reached
Economic growth
An expansion in the productive capacity of the economy
Economies of scale
They occur for a firm when an increase in the scale of productions leads to production at lower long run average costs
Elasticity
The measure of the sensitivity of one variable to changes in another variable
Excess burden of a sales tax
The deadweight loss to society following the imposition of a sales tax
External cost
A cost which is associated with an individual’s (a firm or households) production or other economic activities, which is borne by a third party
Externality
A cost of benefit that is external to a market transaction, and thus not reflected in market prices
Factors of production
Resources used the the production process; inputs into production, including labour, capital, land and entrepreneurship
Firm
An organisation that brings together factors of production in order to produce output
Fixed costs
Costs incurred by a firm that do not vary with the level of output
Free market economy
One in which resource allocation is guided by market forces without intervention by the state
Free-rider problem
When an individual cannot be excluded from consuming a good and thus has no incentive to pay for its provision
Government failure
A misallocation of resources arising from government intervention
Gross domestic product (GDP)
A measure of the economic activity carried out in an economy during a period
Incidence of tax
The way in which the burden of paying a sales tax is divided between buyers and sellers
Income elasticity of demand (YED)
A measure of the sensitivity of quantity demanded to a change in consumer income
Indirect tax
A tax levied on expenditure on goods and services (as opposed to a direct tax, which is a tax charged directly to an individual based on a component of income)
Inferior good
One where the quantity demanded decreases in response to an increase in consumer incomes
Ad valorem tax
A tax levied on a commodity set as a percentage of the selling price
Internalising an externality
An attempt to deal with an externality by bringing an external cost or benefit into the price system
Invisible hand
Term used by Adam Smith to describe the way in which resources are allocated in a market economy
Joint demand
Demand for goods which are interdependent, such that they are demanded together
Joint supply
Where a firm produces more than one product together
Law of demand
A law that states that there is an inverse relationship between quantity demanded and the price of a good or device, ceteris paribus
Macroeconomics
The study of the interrelationships between economic variables at an aggregate (economy-wide) level
Marginal cost
(MC) the cost of producing an additional unit of output
Marginal social benefit
(MSB) the additional benefit that society gains from consuming an extra unit of a good
Marginal social costs
(MSC) the cost to society of producing and extra unit of a good
Market
A set of arrangements that allow transactions to take place
Market economy
Market forces are allowed to guide the allocation of resources within a society
Market equilibrium
A situation that occurs in a market when the price is such that the quantity that consumers wish to buy is exactly balanced by the quantity that firms wish to supply
Market failure
A situation in which the free market mechanism does not lead to an optimal allocation of resources, e.g. Where there is a divergence between marginal social benefit and marginal social costs
Merit good
A good that brings unanticipated benefits to consumers, such that society believes it will be under consumed in a free market
Microeconomics
The study of economic decisions taken by individual economic agents, including households and firms
Minimum wage
A system designed to protect the low paid by setting a minimum wage rate that employers are permitted to offer workers
Mixed economy
Resources are allocated partly through price signals and partly on the basis of direction by government
Model
A simplified representation of reality used to provide insight into economic decisions and events
Moral hazard
A situation in which a person who has taken out insurance is more prone to taking more risk
Normal good
One where the quantity demanded increases in response to an increase in consumer incomes
Normative statement
A statement involving a value judgement that is what ought to be
Opportunity cost
In decision making, the value of the next-best alternative forgone
Pareto optimum
An allocation of resources is said to be a Pareto optimum if no reallocation of resources can make an individual better off without making some other individuals worse off
Positive statement
A statement about what is, i.e. About facts
Price elasticity of demand
PED A measure of the sensitivity of quantity demanded to a change in the price of a good or service
Price elasticity of supply
PES A measure of the sensitivity of quantity supplied of a good or service to a change in the price of that good or service
Private costs
A cost incurred by an individual (firm or consumer) as part of its production or other economic activities
Producer surplus
The difference between the price received by firms for a good or service and the price at which they would have been prepared to supple that good or service
Production externality
An externality that affects the production side of a market, which may be either positive or negative
Production possibility curve
A curve showing the maximum combinations of goods or services that can be produced in a set period of time given available resources
Productive efficiency
Attained when a firm operates at minimum average costs, chiding an appropriate combination of inputs (cost efficiency) and producing the maximum output possible from the or inputs (technical efficiency)
Prohibition
An attempt to prevent the consumption of a demerit good by declaring it illegal
Public good
A good that is non-exclusive and non-rivalrous Consumers cannot be excluded from consuming the good, and consumption by one person does not affect the amount of the good available for others to consume
Resource allocation
The way in which a society’s productive assists are used amongst their alternative uses
Scarcity
A situation that arises because people have unlimited wants in the face of limited resources
Specific tax
A tax of a fixed amount imposed on purchases of a commodity
Subsidy
A grant given by the government to producers to encourage production of a good or service
Substitutes
Two goods are said to be substitutes if consumers regard them as alternatives, so that the demand for one good is likely to rise if the price of he other good rises
Sunk costs
Costs incurred by a firm that cannot be recovered if the firm ceases trading
Superior good
One for which the income elasticity of demand is positive, and greater than 1, such that income rises, consumers spend proportionally more on the good
Supply curve
A graph showing the quantity supplied at any given price
Technical efficiency
Attaining the maximum possible output from a given set of inputs
Total cost
(TC) The sum of all costs that are incurred in producing a given level of output
Unemployment
Results when people seeking work at the going wage cannot find a job
Variable costs
Costs that vary with the level of output
