Micro Key Words Flashcards
Abnormal profit
Profits above normal profits
Allocative efficiency
Achieved when society is producing the appropriate amount of goods and services relative to consumer preferences
Arbitrage
A process by which prices in two market segments will be equalised as a result of purchase and resale by market participants
Average cost
Total cost divided by the quantity produced; sometimes known as unit cost
Average revenue
The revenue received by a firm per unit of output; it is total revenue divided by the quantity sold
Barrier to entry
A characteristics of a market that prevents new firms from readily joining the market
Budget line
Shows the boundary of an individual’s consumption set, given the amount available to spend and the prices of the goods
Cartel
An agreement between firms on price and output with the intention of maximising joint profits
Competition policy
An area of economic policy designed to promote competition within markets to encourage efficiency and protect consumer interests
Conglomerate merger
A merger between two firms operating in different markets
Constant returns to scale
Found when long run average costs remains constant with an increase in output - in other words, when output and costs rise at the same rate
Contestable market
A market in which the existing firm makes only normal profit as it cannot set price higher than average cost without attracting entry, owing to the absence of barriers to entry and sunk costs
Corporate social responsibility
Actions that firms take in order to demonstrate its commitment to behaving in the public interest
Dependency ratio
The ratio of those aged 15 and under and 65 and above to the working population
Derived demand
D mans for a good not for its own sake, but for what it produces
Discount
A process where by the future valuation of a cost or benefit it reduced (discounted) in order to provide an estimate of its present value
Discrimination
A situation in a labour market where some people receive lower wages that cannot be explained by economic factors
Diseconomies of scale
Occur for a firm when an increase in the scale of production leads to higher long run average costs
Dominant strategy
A situation in game theory where a player’s best strategy is independent of those chosen by others
Dynamic efficiency
A view of efficiency that takes into account the effect of innovation and technical progress on productive and allocative efficiency in the long run
Economic rent
A payment received by a factor of production over and above what would be needed to keep it in its present use
Economically active
Active in the labour force, including employed, the self-employed and the unemployed
Economies of scale
Occur for a firm when an increase in the scale of production leads to production at lower long run average costs
Economies of scope
Economies arising when average costs fall as a firm increases output across a range of different products
Environmental Kuznets curve
A relationship between economic growth and environmental degradation, under which environmental degradation at first increases as an economy expands, but then may improve at higher average income levels
Equi-marginal principle
A consumer does best in utility terms by consuming at the point where the ratio of marginal utilities from two goods is equal to the ratio of their prices
External economies of scale
Economies of scale that arise fro. The expansion of the industry in which a firm is operating
Externality
A cost or benefit that is external to the market transaction, borne (or enjoyed) by a third party, and not reflected in market prices
Firm
An organisation that brings together factors of production in order to produce output
Fixed costs
Costs that do not vary with the level of output
Game theory
A method of modelling the strategic interaction between firms in an oligopoly
Horizontal merger
A merger between two firms at the same stage of production in the same industry
Human capital
The stock of skills and expertise that contributes to a worker’s productivity
Hypothecation
In the context of the transport sector, the principle that revenue raised from taxing transport should be used to improve the transport system
ILO unemployment rate
Measure of the percentage of the workforce who are without jobs but are available for work, willing to work and looking for work
Income effect
Reflects the way that a change in the price of goods affects purchasing power
Informal labour market
Economic activity that is not registered or recorded and so is not part of the formal labour market
Internal economies of scale
Economies of scale that arise from the expansion of a firm
Internalising an externality
An attempt to deal with an externality by bringing an external cost or benefit into the price system
Labour productivity
A measure of output per worker, or output per hour worked
Law of diminishing marginal utility
States that the more units of a good that are consumer, the lower the utility for consuming those additional units
Law of diminishing returns
States that if a firm increases its inputs of one factor of production while holding inputs of the other factors fixed, eventually the firm will get diminishing marginal returns from the variable factor
Living wage
An estimate of how much income households need to afford an acceptable standard of living
Long run
The period over which the firm is able to vary the inputs of all its factors of production
Marginal cost
The cost of producing an additional unit of output
Marginal physical product of labour
The additional quantity of output produced by an additional unit of labour input
Marginal principle
The idea that economic agents may take decisions by considering the effect of small changes from the existing situation
Marginal productivity theory
A theory which argues that the demand for labour depends upon balancing the revenue that a firm gains from employing an additional unit of labour against the marginal cost of that unit of labour
Marginal revenue
The additional revenue received by the firm if it sells an additional unit of output
Marginal revenue product of labour
The additional revenue received by a firm as it increases output by using an additional unit of labour input, i.e. The marginal physical product of labour multiplied by the marginal revenue received by the firm
Marginal utility
The additional utility gained from consuming an extra unit of a good or service
Market structure
The market environment within which firms operate
Minimum efficient scale
The level of output at which long run average cost stops falling as output increases
Minimum wage
Legislation under which firms are not allowed to pay a wage below some threshold level set by the government
Multinational corporation
A firm that conducts its operations in a number of countries
Nash equilibrium
A situation occurring within game theory when each player’s chosen strategy maximises payoffs given the other player’s choice, so no player had an incentive to alter behaviour
Natural monopoly
Monopoly that arises in an industry in which there are such substantial economies of scale that only one firm is viable
Net present value
The estimated value in the current time period of the discounted future net benefit of a project
N-firm concentration ratio
A measure of the market share of the largest n firms in an industry
NIMBY syndrome
“Not In My Back Yard” syndrome occurs when people are happy to support the construction of unsightly or unsocial facilities, so long as it is not in their back yard
Non-pecuniary benefits
Benefits offered to workers by firms that are not financial in nature
Non-renewable resource
A resource that cannot be renewed once supply is exhausted
Normal profit
The return needed for a firm to stay in a market in the long run
Participation rate
The percentage of the population in a given age group who are economically active
First degree price discrimination
A situation arising in a market whereby a monopoly firm is able to charge each consumer a different price
Predatory pricing
An anti-competitive strategy in which a firm sets price below average variable costs in an attempt to force a rival or rivals out of the market and achieve market dominance
Price taker
A firm that must accept whatever price is set in the market as a whole
Principal-agent problem
Arises from conflict between the objectives of the principals and their agents who take decisions on their behalf
Product differentiation
A strategy adopted by firms that marks their product as being different from their competitors
Productive efficiency
When a firm operates at minimum average cost, choosing an appropriate combination of inputs and producing the maximum output possible from those inputs
Real earnings
The level of earnings adjusted for the price level; the rate of change of real earnings is thus the rate of change of earnings adjusted for inflation
Relevant market
A market to be investigated under competition law, defined in such a way that no major substitutes are omitted but no no substitutes are included
Renewable resource
A resource that can replenish itself over time
Replacement ratio
The ratio of unemployment benefits to the wage that a claimant could receive in employment
Satisficing
Behaviour under which the managers of firms aim to produce satisfactory results for the firm rather than trying to maximise them
Shadow price
An estimate of the monetary value of an item hat does not carry a market price
Short run
The period over which a firm is free to vary its input of on factor of production but faces fixed inputs of the other factors of production
Social cost benefit analysis
A process evaluating the worth of a project by comparing its costs and benefits, including both direct and indirect social costs and benefits
Static efficiency
Efficiency at a particular point in time
Substitution effect
Reflects the way that a change in the price of a good affects relative prices
Sunk costs
Costs incurred by a firm that cannot be reconverted if the firm ceases trading
Sustainable development
Development that meets the needs of the present without compromising the ability of future generations to meet their own needs
Tacit collusion
A situation occurring when firms refrain from competing on price, but without communication or formal agreement between them
Total cost
The sum of all costs that are incurred in producing a given level of output
Total factor productivity
The average productivity of all factors, measured as the total output divided by the total amount of inputs used
Total revenue
The revenue received by a firm from its sales of a good or service; it is the quantity sold, multiplied by the price
Trade union
An organisation of workers that negotiates with employers on behalf of its members
Transfer earnings
The minimum payment required to keep a factor of production in its present use
Unemployment trap
A situation in which people choose to be unemployed because the level of unemployment benefits is high relative to the wage available in low paid occupations
Unit labour costs
Wages, salaries and other costs of using labour, divided by output per worker
Utility
The satisfaction received from consuming a good or service
Variable costs
Costs that vary with the level of output
Vertical merger
A merger between two firms in the same industry, but at different stages of the production process
Workforce
People who are economically active, either employed or unemployed
Working population
People between the ages of 16 and 64
X-inefficiency
Occurs when a firm is not operating at minimum cost, perhaps because of organisational slack
