Micro key terms Flashcards
Accounting profit
Level of profit that is reported in business accounts. It does not take into account the opportunity cost of investment (normal profit).
Asymmetric information
When one party (consumers or producers) has more or better information about a product than the other party.
Barter system
System of exchanging one product for another without the use of money as a medium of exchange.
Buffer stock system
System of holding and releasing stock to maintain a market price despite supply fluctuations.
Ceteris paribus
Other things being equal - the assumption that everything else stays the same when looking at microeconomic models.
Collusion
Scenario in which firms work together in secret to gain an unfair market advantage.
Competition policy
Legislation and regulation that aims to make a market more competitive.
Competitive demand
When consumers demand one or the other product. The products are substitutes.
Competitive supply
When producers choose to supply one or the other product with given factors of production.
Complement
A good with a negative XED. As the price of Product B increases, the quantity demanded of Product A decreases (and vice versa).
Composite demand
When a product is demanded for multiple possible uses.
Concentration ratio
Way of measuring the market dominance of the top few firms in the market by adding up each firm’s individual market share and looking at this is a percentage of the total market.
Consumer surplus
Difference between the price consumers are willing and able to pay and the market price.
Contestable market
Market structure in which no firm can dominate enough to make supernormal profits.
Contraction of demand
A decrease in the quantity demanded.
Contraction of supply
A decrease in the quantity supplied.
Corporate social responsibility (CSR)
When a business aims to make a profit, do good for society and improve the environment.
Cross elasticity of demand (XED)
Measures the responsiveness of demand for one product to a change in the price of another product.
Decrease in demand
A shift inward of the demand curve so that there is a decrease in quantity demanded at every price.
Decrease in supply
A shift inward of the supply curve so that there is a decrease in quantity supplied at every price.
Demand
A consumer’s desire and willingness to purchase goods and services at a specific price.
Demand curve
Relationship between the price of a product and the quantity demanded by the market.
Demand for labour
Willingness and ability of a firm to hire labour at different wage rates.
Demerit good
Good that is likely to be over consumed in a free market because the consumer does not anticipate the lack of benefits.
Derived demand
Where demand is based on what that thing can produce, not the thing itself, e.g the demand for labour.
Direct taxation (tax)
Amount levied on a business or an individual that must be paid to the government.
Diseconomies of scale
Increases in average costs that can occur from the growth of a business.
Division of labour
Splitting up a task into smaller activities to be able to produce more efficiently
Dynamic efficiency
Incentive to innovate products and processes to become productively efficient in the long term.
Economic agents
Key groups involved in the economic problem, including governments, firms and households.
Economic goods
Goods that are scarce, i.e there is not an unlimited supply of these goods.
Economic rent
Any amount above the minimum needed to keep a factor of production in its current use.
Economics
The study of how scarce/limited resources are used in the world.
Elasticity
Responsiveness of a change in one thing to a change in something else.
Excess demand
Scenario in which the market price is too low, meaning there are unsatisfied consumers in the market.
Excess supply
Scenario in which the market price is too high, meaning there are unsold products in the market.
Extension of demand
An increase in the quantity demanded.
Extension of supply
An increase in the quantity supplied.
External economics of scale
Reductions in average costs that can occur from the growth of an industry.
Externality
A cost or benefit to a third party that has not been accounted for in the market transaction.
Factors of production
Land, labour, capital and enterprise, the building blocks needed for a business to operate.
Fixed costs
Costs that do not change as output changes.
Free goods
Resources that are usually not seen as limited, such as sunlight or air.
Free rider problem
Occurs when a person benefits from consuming a shared resource or good without paying for that good.
Government failure
When government intervention does not reduce market failure and may even increase it or introduce a new failure in the market.
Growth maximisation
When a business aims to increase its size as much as possible.
Incentive
Something that motivates an action. In economics, this usually relates to profit, prices and social welfare (the objectives of economic agents).
Income
Flow of money over a period of time.
Income elasticity of demand (YED)
Measures the responsiveness of demand after a change in income.
Increase in demand
A shift outward of the demand curve so that there is an increase in quantity demanded at every price.
Increase in supply
A shift outward of the supply curve so that there is an increase in quantity supplied at every price.
Indirect taxation (tax)
Amount levied on a producer to increase the cost of a product.
Individual demand
One consumer’s willingness and ability to purchase a product or service at a given price.
Individual supply
One business’s willingness and ability to sell a product at a given price.
Inferior good
When income changes, the quantity demanded of this good will change by a smaller proportion in the opposite direction.
Information failure
When consumers and/or producers do not have all the information when making decisions, leading to market failure.
Information provision
Act of informing the public about the true nature of a product or market.
Interdependence
Scenario in which firms base their decision- making on the decision of other firms in the market.
Internal economies of scale
Reductions in average costs that can occur from the growth of a business.
Joint demand
When products are demanded together. The products are complements.
Joint supply
When products are supplied together, often as a byproduct.
Kinked demand curve
Illustrates an elastic response to an increase in price and an inelastic response to a decrease in price.
Law of diminishing returns
Theory that in the short run, when at least one factor of production is fixed, the average return from a factor of production decreases.
Legislation
In relation to the economy, laws that a government puts in place in govern the production of and and consumption of products.
Long run perfect competition
Market structure that has allocative and productive efficiency.
Loss
If a business has higher costs than revenue, it will make a loss.
Luxury good
A good for which when income changes, the quantity demanded will change by a larger proportion in the same direction.
Macroeconomics
The study of the behaviour and performance of am economy as a whole.
Marginal costs
Costs of producing one more product.
Marginal utility
Benefit gained from consuming one more unit of a product.
Market demand
The sum of all consumers’ willingness and ability to purchase a product or service at a given set of prices.
Market disequilibrium
Any situation where supply does not equal demand. This could be a scenario where there is excess supply or excess demand.
Market economy
Allocation of resources is decided by the interaction of supply and demand (market forces).
Market equilibrium
Point at which the quantity supplied is equal to the quantity demanded of a particular product.
Market failure
Failure of the market system to allocate resources efficiently.
Market supply
Sum of all businesses’ willingness and ability to sell a product at a given set of prices.
Merit good
Good that is likely to be under consumed in a free market because the consumer does not anticipate all the benefits.
Microeconomics
The study of the behaviour of individuals, firms and governments in relation to the allocation of products and/or resources.
Minimum efficient scale
Lowest point on the average cost curve.
Mixed economy
Combination of market forces and and government policies that control the allocation of resources.
Mobility of labour
Ability of workers to move geographically in order to respond to changes in wages and conditions of work.
Monopolistic competition
Competitive market structure with a downward sloping demand curve and the ability for a firm to make supernormal profit in the short run.
Monopoly
Situation in which there is a single seller in the market with no competitors.
Monopsony
A single or dominant buyer of a product.
Moral hazard
When one party (consumers or producers) changes their behaviour due to asymmetric information, which causes extra costs to the other party.
Movement along the demand curve
Change in quantity demanded that results from a change in the price of a product.
Movement along the supply curve
Change in quantity supplied that occurs from a change in the price of a product.
Natural monopoly
Type of monopoly in which there are large economies of scale to be gained to the point where only one firm is viable.
Negative externality (external cost)
Cost to a third party that has not been accounted for in the market transaction.
Negative externality of consumption
Cost to a third party that arises from consumption of a product. This cost has not been accounted for in the market transaction.
Negative externality of production
Cost to a third party that arises from production of a product. This could has not been accounted for in the market transaction.
Non-excludability
When potential consumers cannot be prevented from consuming a good without paying for it.
Non-price competition
Scenario in which firms compete on aspects other than price, such as the product, location and branding.
Non-rejectability
When consumption cannot be prevented by a consumer.
Non-rivalry
When consumption of a good does not prevent consumption by another person. Also known as non-diminishability.
Normal good
When income changes, the quantity demanded of this good will change by a smaller proportion in the same direction.
Normal profit
Minimum amount of profit required to convince an owner to stay in the market.
Normative statement
Opinion-based statements that one might agree or disagree with.
Oligopoly
Market structure with a few dominant firms.
Opportunity cost
Cost of the next best alternative forgone when a decision is made.
Overt collusion
Scenario in which firms work together with a formal agreement.
Perfect competition
Market structure with many buyers and sellers that can achieve allocative and productive efficiency in the long run.
Planned economy
The government controls the factors of production and decides on the allocation of resources.
Positive externality
Benefit to a third party that has not been accounted for in the market transaction.
Positive externality
Benefit of the third party that arises from consumption of a product. This benefit has not been accounted for in the market transaction.
Positive externality of production
Benefit to a third party that arises from production of a product. This benefit has not been accounted for in the market transaction.
Price control
A minimum or maximum price for which a product must be sold.
Price discrimination
The ability of a firm to charge different prices to different customers.
Price elastic (demand)
When price changes, the quantity demanded changes by a larger proportion.
Price elasticity of demand (PED)
Measures the responsiveness of demand after a change in price.
Price elasticity of supply (PES)
Measures the responsiveness of supply to a change in price.
Price elastic (supply)
When price changes, the quantity supplied will change by a larger proportion.
Price inelastic (demand)
When price changes, the quantity demanded changes by a smaller proportion.
Price inelastic (supply)
When price changes, the quantity supplied will change by a smaller proportion.
Price maker
A firm that has the ability to choose at what price it sells its products.
Price taker
An individual or firm that must accept the ruling market price as it lacks the power to influence the market price.
Principal-agent problem
The potential disagreement over the objectives of the managers (principals) and those of the owners (agents).
Producer surplus
Difference between the price at which producers are willing and able to supply a product(s) and the market price.
Product differentiation
Features or elements that make one product different from its competitors. Often used when sticky prices exist in a market.
Productivity
Amount produced in relation to 1 unit. For example, labour productivity is the amount produced by 1 unit of labour.
Profit
Amount of money a business gains from its sales after it has accounted for all of its costs.
Profit maximisation
When a business aims to have the most difference between total costs and total revenue, leading to the highest profit.
Profit satisficing
When a business sets a level of profit that it believes will be enough to keep the owners satisfied.
Public goods
Goods that have the characteristics of being non-excludable, non-rivalrous, non-rejectable and with zero marginal cost.
Public/private partnership
Joint initiative between government and a producer(s) in order to increase supply to a market.
Rationality
Assumption that each economic agent acts in their own best interests.
Regulation
Rules that are specific to an industry or market and that govern the production or consumption of a product within that industry/market.
Reward for the factors of production
What needs to be returned by a business for using each of the factors of production.
Sales revenue maximisation
When a business aims to sell at a price that allows it to make the most profit through sales.
Sales volume maximisation
When a business aims to sell as many units as possible.
Scarcity
When there is a limited amount of something.
Short run perfect competition
Market structure that has allocative efficiency but not productive efficiency.
Social welfare
When a business aims to make society better through its actions.
Specialisation
Focusing on one activity (or part of an activity) to be able to produce more efficiently.
Sticky prices
Scenario in which the price of a good is slow to change despite changes in the market that suggest a different price is optimal.
Subsidy
Amount paid to a business to produce products.
Substitute
A good with a positive XED. As the price of product A increases, the quantity demanded of product B also increases (and vice versa)
Supernormal profit
Profit made above normal profit.
Supply
Ability and willingness of a firm to sell products at a given price.
Supply curve
Relationship between the price of a product and the quantity supplied by businesses.
Supply of labour
Ability and willingness of households to work at different wage levels.
Tacit collusion
Scenario in which firms work together without a formal agreement, often by observing other firms in the market.
The economic problem
The problem of how to make the best use of limited or scarce resources.
Total costs
All costs incurred by a business.
Total revenue
The money a business receives from all of its sales.
Total utility
Total benefit gained from consuming a product.
Tradeable pollution permits
System that forces producers to include the costs of pollution in their production decisions.
Trade-off
A sacrifice that is made in order to gain something.
Trade union
Collection of workers usually in the same or similar industry that collectively bargains for the workforce on issues like fairness of pay, working conditions and benefits.
Transfer earnings
Minimum amount needed to keep a factor of production in its current use.
Unit labour costs
Average cost of labour per unit of output.
Utility
Benefit gained from consuming a product.
Utility maximisation
When the managers of a business aim to increase their own happiness as much as possible.
Variable costs
Costs that change as output changes.
Wage differentials
Differences in wages between workers with different skills in the same industry or those with comparable skills in different industries.
Wage elasticity of demand for labour
Responsiveness of the quantity demanded for labour to changes in wages.
Wage elasticity of supply of labour
The responsiveness of the quantity supplied of labour to changes in wages.
X-inefficiency
Lack of incentive to reduce costs.
Zero marginal cost
When production of an additional unit does not add extra costs to the business.
