micro economics defintions Flashcards
need
A need is something that is essential for maintaining life, such as air, water, food, shelter and sleep
want
want is something that is desired by an individual or society
economic welfare
economic welfare refers to the level of prosperity and quality of living standards in an economy. It can be measured through a variety of factors such as GDP.
positive statement
is a statement that can be tested and verified and is not based on a value judgment . For example, stating that the current level of unemployment is 4.1% is positive because it can be tested and either verified or falsified
normative statement
those that express a value judgment or preference on one outcome over another. They are ideologically prescriptive and cannot be verified or falsified using objective data analysis.
factors of production
factors of production refer to the different inputs that are used in producing goods and services. The four main factors of production are: land, capital, labour and entrepreneurship.
fundamental basic economic problem
The fundamental economic problem is the issue of scarcity and how best to produce and distribute these scare resources.
scaresecoonomic resources in comparison wity societys unlimited wants
scarity
Scarcity means there is a finite supply of goods and raw materials. Finite resources mean they are limited and can run out.
opportunity cost
the cost of the next best alternative that you give up when you have to make a choice
PPF
A diagram that shows the maximum possible output combinations of two goods in an economy assuming a full and efficient employment of resources
productive efficiency
it is the ability of an economy to produce goods and services at the lowest possible cost with resouces avaliable
When maximum output is produced from the available factors of production and when it is not possible to produce more of one good or service without producing less of another
allocative efficiency
When an economy’s factors of production are used to produce the combination of goods and services that maximise the society’s welfare
utility
The amount of satisfaction or benefit that a consumer gains from consuming a good or service
utility maximisation
the concept that individuals or organisations seek to attain the highest level of satisfaction from their economic decisions
rational consumer
consumer who carefully considers the costs and benefits of different choices and make decision to maximise their utility slash satisfaction may weigh out factors such as price quality and personal preferences.
diminishing marginal utility
as you consume more of a good or service the additional satisfaction or utility you derive from each additional unit decreases
effective demand
desire and ability of consumers to purchce goods and services at a given price level?
market demand
total quantity of a product or service that all customers in a specific market are willing to be able to purchase at a given price level.
individual demand
quantity of a good or service that an individual consumer is willing or able to purchase at various price levels.
condition of demand
the various factors that influence the quantity of product or service that consumers are willing and able to purchase other than price levels
substitute goods
products or services that can be used in place of each other to satisfy similar needs or wants.
complementry goods
products or services that are typically used together to satisfy a common need or want.
normal good
a good which demand increases as income rises and demand decreases as income falls
inferior good
a good for which demand decreases as income rises and demand increases as income falls
market supply
total quantity of a good or service that all suppliers are willing and able to offer for sale at different prices in a given market.
profit
the difference between total sales revenue and total costs of production.
condition of supply
the various of the factors that influence the quantity of a good or service that supplies are willing and able to provide
market of supply
a market is in equilibrium when planned demand equals planned supply where the demand curve crosses the supply curve
market disequlibrium
exist at any price other than the equilibrium price when either planned demand is less than planned supply or planned demand is more than planned supply
excess supply
when firms wish to sell more than consumers wish to buy, with the price above equilibrium price
excess demand
when consumers wish to buy more than firms wish to sell the price below the equilibrium price
joint supply
when one good is produced of a good is also produced from the same materials perhaps as a by product
composite demand
demand for a good witch has more than one use which means that an increase in demand for one use of the good reduces the supply of the good for an alternative use it is related to the concept of competing supply
derived demand
demand for good or factor of production wanted not for its own sake but as a consequence of the demand for something else
joint demand
A situation where two or more goods are demanded together because they are used together and complement each other
Rationing function
rising prices to ration demand for a product, Or decreasing prices to Ration supply
Signalling function
Prices provide information to buyers and sellers
Incentive function
Prices create incentives of people To alter their economic behaviour for example a higher price creates an incentive for firms to supply more of a good or service
Allocative function
Changing relative prices allocate scarce resources away from markets exhibiting excess supply and into markets in which that is excess demand
Inelastic demand
The quantity demanded is not a very responsive to changes in price, even if the price increases or decreasing demand remains the same / stable this includes necessity items where there is limited substitutes
Elastic demand
This is where quantity demanded of a product or service is highly responsive to changes in prices if the price of the product increases the demand decreases and vice versa this is why there is many substitutes and products are non essential
Price elasticity of demand
measures the responsiveness of quantity demanded given a change in price
Perfectly priced inelastic
Regardless of the price changing quantity demanded won’t change Lifesaving medicines, addictive substances they’re not essential but people will still be willing to pay if there is an increase in price
Perfectly priced elastic
In extreme examples a change in price will have an infinitely large change in quantity demanded ,consumers are highly responsive and are not willing to pay at a higher price For example clothes, electronics there is many substitutes
Unitary elastic
The value of ped is exactly one
Income elasticity of demand
y E D- Measures the responsiveness of quantity demanded given a change in income
Luxury goods
Products or services that are considered nonessential
Necessities
Go to services that are considered essential for basic needs and are required for a daily living
Cross elasticity of demand
Is the responsiveness of a change in demand of one good (x) To a change in the price of another good(y)
Complementary goods
Have a negative cross elasticity of demand if one good becomes more expensive the quantity demanded for both goods will fall
Products or services that are consumed together or used in conjunction with each other for example printer and ink cartriges
Substitutes
Can replace another good They cross elasticity of demand is positive and the demand curve is upward sloping if the price of one brand of a tv increases consumers might switch to another brand
Goods or services that can be used in place of each other for a similar purpose or need e.g., coke and pepsi
Price elasticity of supply
Measure the responsiveness of quantity supplied to a change in price, reflects the ability of producers to change the output following a change in demand
market failure
When the market mechanism leads to a misallocation of resources in the economy, either completely failing to provide a good or service or providing the wrong quantity
Complete market failure
A market fails to function at all and a ‘missing market’ results
Partial market failure
A market does function but it delivers the wrong quantity of a good or service which results in resource misallocation
Missing market
A situation in which there is no market because the functions of prices have broken down
Public good
A good such as a radio programme that is non-excludable and non-rival
Private good
A good such as an orange that is excludable and rival
Excludable good
People who do not want to pay can be excluded from benefiting the good
Rival good
When one person consumes a private good the quantity available to others diminishes
Quasi public good
A good which is not fully non-rival and / or where it is possible to exclude people from consuming the product
externality
Knock on effects of economic transactions upon third parties that exist when there is in divergence between private and social costs and benefits
Positive externality
An external benefit of that occurs when the consumption or production of a good causes a benefit to a 3rd party where the social benefit is greater than the private benefit
Private cost
Expenses or costs incurred by an individual or firm in the production or consumption of goods and services
Social benefit
The total benefit of an activity including the external benefit as well as the private benefit. As the equation social benefit = private benefit + external benefit
Private benefit
Personal gains or benefits that individuals or firms receive from the consumption or production of goods and services
Negative externality
An external cost that occurs when the consumption or production of a good causes costs to a third party whether social cost is greater than the private cost
Social costs
The total cost of an activity including the external costs as well as the private cost expressed as an equation social cost= Private cost+ External cost
Information failure
Occurs when people make wrong decisions because they do not process or if they ignore relevant information they are often of myopic / shortsighted about the future
Environmental market failure
Situation where the free market fails to Efficiently allocate resources and address environmental issues
Property rights
the exclusive authority to determine how a resource is used/ Legal rights and ownership that individuals or firms have over assets or resources
Tragedy of the Commons
Shared all common resources overexploited or depleted due to lack of individual responsibility or ownership
Merit good
A good such as health care for which a social benefits of consumption exceed the private benefits. Judgments are involved in deciding that a good is a merit good
Demerit good
Goods such as tobacco for which their social costs of consumption exceed the private costs. Judgments are involved in deciding that a good is a demerit good
Occupational immobility
When workers are unwilling or unable to move from one type of a job to another for example because different skills are needed
Geographical immobility
When workers are unwilling or unable to move from one area to another in search of work
Asymmetric information
When one party to a market transaction possesses less information relevant to the exchange than the other
monopoly
an extreme example of a market structure where only one firm supplies to the market
indirect tax
Expenditure taxes that increase cost of production for firms but can be transferred to consumers via higher prices
subsidy
a money grant to firms by the government to reduce costs of production and encouraging increased output
Minimum price
A fixed price / price floor enacted by the government usually set above the equilibrium price, can distort markets and create excess supply
Maximum price
A fixed price/ price ceiling enacted by the government usually set below the equilibrium market price, Can distort markets by creating access demand
Regulation
rules/ laws enacted by the government that must be followed by the economic agents to encourage a change in behaviour
pollution permits
Market based approach to control pollution Set a limit on the total amount of pollution that can be emitted by various industries these permits can be bought sold or traded amongst these industries
free rider problem
a situation where some individuals benefit from a public good or service without contributing to its cost.
Bounded rationality
When making decisions individuals rationality is limited by the information they have, the limitations of their minds and the finite amount of time available in which to make decisions
Bounded self-control
Individuals inability to make rational decisions due to The inability to control themselves
Rules of thumb
Thinking shortcuts or informed guesses that individuals use to make decisions in order to save time And effort
Anchoring
The tendency of individuals to rely on particular pieces of information were making choices between different goods and services
Availability bias
A cause when individuals make judgments about the likelihood of future events according to how easy it is to recall examples of similar events
Social norms
Forms or patterns of behaviour considered acceptable by society or group within that society
Altruism And fairness
Individuals are motivated to do the right thing even if it means paying more for a good or service as they are concerned for the welfare of others
Choice architecture
A framework setting out different ways in which choices can be presented to consumers and impact the presentation on consumer decision making
Framing
How something is presented influences the choices people make for example the way words and numbers are used
Nudges
Factors which encourage people to think and act in a particular way not just try to shift group And individual behaviour in ways which comply with desirable Social norms
Default choice
An option that is selected automatically in less an alternative is specified
Influencing consumer behaviour by setting socially desirable choices as default options
mandated choice
Where people are legally required to make a decision
Restricted choice
Offering people a limited number of options so that they are not overwhelmed by the complexity of the situation. Too many choices people might make poorly thought out decisions or not make a decision
production
The total output of goods and services produced by an individual, firm or country
short run production
a period during which at least one factor of production is fixed. Typically, this factor is capital, such as machinery or buildings. In the short run, firms can only adjust variable inputs like labor and raw materials to meet changes in demand.
long run production
a time period during which at least one factor of production is fixed while others can be varied. This period is characterized by the inability to adjust all inputs to respond to changes in demand or other economic conditions.
productivity
a measrurment of the rate of production by one or more factors of production
labour productivity
output per worker per unit of time
capital productivity
output per unit of capital
productivity gap
the difference between labour productivity e.g., in the Uk and in other developed economies
specialisation
We’re an individual worker, firm, region or country produces a limited range of goods or services
Division of Labour
specialisation at the level of an individual worker
Trade
the Buying and setting of goods and /or services
exchange
To give something in return for Something else received. Is a medium of exchange
