Micro Definitions Flashcards
Absolute Poverty
The inability to purchase the basic necessities of life, such as food, clean water and shelter. The World Bank sets its definition of absolute poverty as living on less than $1.25 per day. In the UK, the term is most readily applied to the homeless.
Average Cost (AC)
Total cost divided by output - also known as unit cost.
Average Fixed Cost (AFC)
Total fixed cost divided by output.
Average Revenue
Total revenue divided by output sold - equivalent to price.
Average Variable Cost (AVC)
Total variable cost divided by output.
Backward-Sloping Labour Supply Curve
A labour supply curve showing the dominance of the substitution effect at lower wage levels, and the increasing influence of the income effect at higher wage levels.
Barriers to Entry
Obstacles to new firms looking to enter the market.
Barriers to Exit
Obstacles to incumbent firms looking to exit the market.
Bilateral Monopoly
A market with a single buyer and a single seller.
Capital-Intensive Production
Where the production of a good or service requires a large amount of capital, relative to other factors of production.
Capital-Output Ratio
The amount of capital needed to generate each unit of output.
Cartel
A group of firms that produce separately but agree to sell at a uniform price.
Classical Economics
A theory that suggests that free markets will always clear, with prices and quantities adjusting to changes in the patterns of supply and demand, thus allowing the economy to produce up to its potential output.
Collusion
Where firms agree, tacitly or otherwise, not to compete on price, service provision, or any other matter, when to do so might affect both firms adversely.
n-Firm Concentration Ratio
The market share held by the n largest firms.
Constant Returns to Scale
Long Run Average Cost (LRAC) remaining unchanged when the scale of production is increased.
Contestability
The extent to which entry to and exit from a market is free and costless - i.e. there are minimal barriers to entry/exit.
Contestable Market
A market in which there are no barriers to entry or exit, and the costs faced by new and incumbent firms are equal.
Cross-Subsidisation
A business practice whereby revenue from profitable activities is used to support loss-making ones - a key benefit of business diversification.
Dependency Ratio
The proportion of the population which is too young, old or sick to work, and is therefore reliant on the output of those who are in work - increasing in virtually all developed economies due to the ageing population.
Deregulation
The removal of regulations on business activity.
Derived Demand
Refers to the fact that firms’ demand for labour is influenced by consumers’ demand for the output that workers produce - higher consumer demand leads to higher price, leads to higher MRP, leads to higher demand for labour.
Diseconomies of Scale
An increase in LRAC, brought about by an increase in the scale of production.
Disequilibrium Unemployment
Unemployment brought about by the Aggregate Supply of labour exceeding the Aggregate Demand for labour.
Dominant Monopoly
A monopoly market in which the largest firm holds more than 40% of the market share.
Dynamic Efficiency
A measure of how effective a firm is at developing and introducing new products and production techniques, where doing so serves to reduce unit costs over time.
Earnings
Wages, plus overtime pay, bonuses and commission.
Economic Rent
A surplus paid to a factor of production (usually labour) over and above what is needed to keep it in its current occupation. Can be diagrammatically represented by the area between the Supply of Labour curve and the prevailing wage rate.
Economically Inactive
People of working age who are neither in work or actively seeking employment (unemployed), and therefore are not part of the labour force.
Geographical Immobility of Labour
Barriers to the movement of workers between different areas of the country, such as differences in the cost of living.
Gini Coefficient
A measure of comparative levels of income inequality in an economy, found using the formula A/A+B on a Lorenz curve. A high Gini coefficient is indicative of a high level of inequality.
Growth Maximisation
A business objective that prioritises increasing the size of the firm as far as possible - a firm with this as its primary objective may produce at AC=AR, i.e. the highest possible output whilst maintaining normal profits, or will look to make supernormal profits and reinvest them into research and development in order to reduce LRACs and
Hit-and-Run Competition
Firms quickly entering a market in which supernormal profits are being made, and leaving as soon as those profits disappear - an example of this is temporary stalls which are set up around Christmas. The occurrence of this type of competition is indicative of a high level of contestability.
Human Capital
The knowledge and skills of the labour force.
Income Effect
When a wage change leads to the substitution of leisure for work, as the worker is able to take more time for leisure whilst maintaining a constant level of income. Generally prevalent at higher income levels.
Infrastructure
Anything that provides for the operation of transport.
Interdependence
When the actions of one firm provoke counter-actions by another.
Internal Diseconomies of Scale
Diseconomies of scale experienced by a firm which arise from the its own growth.
Internal Economies of Scale
Economies of scale which occur within a firm as a result of its own growth.
Kinked Demand Curve
A demand curve made up of two parts on either side of the equilibrium, each with different gradients. Implies that oligopolists will follow each other’s price cuts, but not price increases.
Labour Force
All people of working age who are either in or actively seeking employment.
Participation Rate
The proportion of the population of working age who are economically active.
Labour-Intensive Production
Any production process which involves a large amount of labour, relative to other factors of production.
Legal Monopoly
A market in which one firm holds more than 25% of the market share.
Limit Pricing
When an incumbent monopolist sets low prices in order to discourage the entry of new competitors into the market.
Long-Run
The period of time in which all factors of production are considered variable.
Lorenz Curve
A diagram commonly used to illustrate the distribution/inequality of wealth or income.
Managerial Economies of Scale
Reductions in LRAC due to the specialisation of management.
Marginal Cost
The changes in a firm’s total cost resulting from increasing output by one unit.
Minimum Efficient Scale
The minimum level of output at which full advantage can be taken of economies of scale (i.e. LRAC is minimised).
Natural Monopoly
A market in which only a monopolist can fully exploit the available economies of scale, e.g. the LRAC curve is continually downward-sloping.
Monopolistic Competition
A market structure in which a large number of small firms compete, but there is an element of monopoly in the form of product differentiation and other non-price factors.
Normal Profit
The minimum level of profit necessary to keep a firm in the market - occurs where AC=AR.
Occupational Immobility of Labour
Barriers to workers switching between occupations - include lack of necessary skills/qualifications and closed-shop union involvement.
Occupational Segregation
The dominance of a particular profession by members of one demographic group - most commonly applied to gender.
Oligopoly
A market structure in which a few large firms dominate production.
Part-Time Workers
Workers who work fewer than 30 hours a week.
Perfect Competition
A market structure in which a large number of small buyers and sellers compete, there is a homogeneous product, and there are no barriers to entry to or exit from the market.
Predatory Pricing
Setting a low price with the aim of forcing rivals out of the market and thereby gaining market share - technically illegal, but difficult to quantify - Amazon have made a loss for many years, but continue to offer extremely low prices, for example.
Price Maker
A firm that influences price when it varies its output - i.e. its production decisions have a tangible effect on overall supply to the market.
Price Taker
A firm operating in a competitive market which must accept the prevailing price, over which it has no influence.
Price Stability
When the price of a good or service does not change, or if it does change, that change will be too insignificant to tangibly influence the decisions of firms or households.
Privatisation
The sale of state-owned business to the private sector
Product Differentiation
Where there are minor differentiations in the products available within a market - a characteristic of Monopolistic Competition.
Profit Maximisation
A business objective which prioritises profits above all else - occurs at MC=MR
Profit Satisficing
A business objective which prioritises a level of profits which is enough to satisfy its stakeholders, but may fall short of maximum profits - some profits will be sacrificed in order to achieve strong performance in other areas, such as marketing. Strongly associated with the separation of ownership and management.
Relative Poverty
A situation of being poor relative to others in the same economy - usually expressed as an income below an arbitrary percentage of the median in that economy.
Sales Maximisation
A business objective which prioritises sales volume above all else. A firm operating with this objective will produce at AC=AR - the greatest level of output possible whilst maintaining normal profits.
Revenue Maximisation
A business objective which prioritises total revenue above all else. A firm with this objective will produce where MR=0.
Stakeholders
All people affected by the activity of a firm. Range from owners to managers to workers to local residents.
Stocks
The amount of finished goods that a firm holds in reserve in order to be able to satisfy sudden increases in demand.
Substitution Effect
When an increase in a worker’s wage rate leads to them working more hours at the expense of leisure time, as the opportunity cost of labour increases. Prevalent at lower wage levels.
Sunk Costs
Costs incurred by a firm that cannot be recovered upon exit from the market.
Supernormal Profit
Any profit earned by a firm over and above the level required to keep it in the market - occurs when average revenue exceeds average cost.
Utility Maximisation
A business objective which prioritises the maximisation of either employees or consumers, or both. The clearest example of this is football teams, which are often willing to post losses in order to achieve on-pitch success.
Variable Costs
Costs that vary along with the level of output produced - labour is a key example of this.
X Inefficiency
When a firms costs are higher than they could potentially be - i.e. it is operating on a higher AC curve than is necessary. Often associated with the growth of unnecessary middle-management.
