Micro Review Flashcards
Demand
Demand is the quantity of a good or service that consumers are willing and able to purchase at a given price in a given time period
Market Demand
Market demand is the total quantity demanded by all consumers which can be achieved by adding all of the individual demand at the same/other prices
Law of Diminishing Marginal Utility
The law of diminishing marginal utility refers to the decrease in additional satisfaction that consumer gets from consuming additional units of a good per period. Thus individuals are willing to pay less to buy more units of a good per period of time
Normal Goods
A good where the demand for it increases as income increases
Inferior Goods
Lower quality goods for which higher quality substitutes exist, if income rises demand for the lower quality good decreases
Supply
Supply is the quantity of a good or service that producers are both willing or able to sell at a given price in a given time period.
Market Supply
Market supply is the sum of the all the individual producers supply at a given price in a given period of time
Factors of Production and its costs
Land - Rent
Labour - Wages
Capital - Interest
Enterprise - Profits
Market equilibrium
Occurs at the price where the quantity of a product demanded is equal to the quantity supplied. This is the market clearing price. Since there is no excess demand or excess supply
Consumer Surplus
The difference between how much a consumer is at most willing to pay for a good and how much they actually pay
Producer surplus
The benefit enjoyed by producers by receiving a price that is higher than the price they were willing to receive
Allocative efficiency
achieved when just the right amount of goods and services are produced from society’s point of view so that scarce resources are allocated in the best possible way. MSB = MSC
Rational Consumer Choice
occurs when consumers make choices based on the following assumptions : they have consistent tastes and preferences, they have perfect information and they arrange their purchases so as to maximise their utility
Utility Maximization
The goal of the rational consumer to maximise utility while satisfying the budget constraint
Bias - Rules of Thumb
Decision Making short cuts which enables individuals to make quick decisions
Bias - Anchoring
Takes place when people rely on a piece of info that is not necessarily relevant as a reference point when making a decision
Bias - Framing
refers to how options and opportunities are presented to people, which can significantly influence their choices .
Bias - Availability
relates info that is most recently available and on which people place most importance
Elasticity
a measure of the responsiveness of an economic variable to a change in another economic variable
PED
A measure of the responsiveness of the quantity demanded of a good or service to a change in ifs price
PES
A measure of the responsiveness of the quantity demanded of a good or service to change in its price
Why is PED important for governments
it helps governments interested in increasing their tax revenues to decide on which goods to impose an indirect tax on
it allows gov to estimate the size of the necessary tax required to decrease consumption of demerit goods such as cigs or alc.
Why is PED important for firms
it allows them to predict the direction of change of their revenues given a price change
It helps them to determine the extent to which they can shift an indirect tax on to the consumer
YED
Income elasticity of demand is the responsiveness of demand to changes in income
Reasons for gov intervention in markets
earn gov revenue
support firms
support households on low incomes
influence level of production
influence the level of consumption
correct market failure
promote equity
Main forms of gov intervention
price controls - ceilings (maximum prices & floors (minimum prices)
indirect taxes and subsidies
direct provision of services
command and control regulation & legislation
consumer nudges
PEP + trick
The beneficial effects that are enjoyed by third parties whose interests are not accounted for when a good or a service is produced, therefore they do not pay for the benefits they receive
PEC
the beneficial effects that are enjoyed by third parties whose interests are not accounted for when a good or a service is consumed, therefore they do not pay for the benefits they receive
Welfare loss
A loss of a part of social surplus that occurs when there is a market failure so that MSB is not equal to MPB
NEP + trick
Negative effects suffered by a third party whose interest are not considered when a good or a service is consumed, so the third party are therefore not compensated
NEC
Negative effects suffered by a third party whose interests are not considered so when a good or a service is consumed, so the third party are therefore not compensated
Demerit goods
Goods or services that not only harm the individuals who consume these but also society at large + overconsumed
due to NEC
e.g - tobacco, alcohol, drugs
Merit goods
Goods or services considered to be beneficial for people that are under provided by the market and so underconsumed due to PEC
e.g - education, healthcare, public transport
Common pool resources
A diverse group of natural resources that are non excludable but their use is rivalrous, for example fisheries & forests
Tragedy of the commons
A situation with common pool resources where individual users acting independently according to their own self interest, go against the common good of all users by depleting or spoiling that resource
Tradable permits
Permits to pollute, issued by a governing body, that sets a maximum amount of pollution allowable. These permits may be traded (bought or sold) in a market for such permits
Carbon tax
Taxes levied on carbon content of fuel. They are a type of pigouvian tax
Collective self governance
In the case of a common pool resources such as a fisher, users solve the problem of overuse by devising rules concerning the obligations of the users, monitoring use of the resource, penalties of abuse and conflict resolution
Public goods
goods or services that have the characteristics of non-rivalry and non excludability, for example flood barriers.m
Non - rivalrous
A characteristic of some goods such that their consumption by one individual does not reduce the ability others to consume them. Characteristic of public goods
e.g public safety, street lights
Non - excludable
Characteristic of a good, service a resource where it is impossible to prevent people from using it
e.g - public roads, national defence, clean air
Free rider problem
arises when individuals consume a good or service without paying for it because they cannot be excluded from enjoying it
e.g lighthouse
Asymmetric information
A type of market failure where one party in an economic transaction has access to more or better information than the other party
Adverse selection
A type of market failure involving asymmetric information where the party with incomplete information is induced to withdraw from market.
Moral Hazard
A type of market failure involving asymmetric information where a party takes risks but does not face their full costs by changing behaviour after a transaction has taken place. It is very common in insurance markets
Responses to asymmetrical information
government responses : legislation, regulation, provision of information
private responses : signalling and screening
Perfect Competition
A market structure where there is a very large number of small firms, producing identical products with no barriers to entry or exit, and perfect information. All the firms are thus price takers
Monopoly
A market structure where there is only one firm in the industry, so the firm is the industry. There are high barriers to entr
Oligopoly
A market structure where there are a few large firms that dominate the market with high barriers to entry
Marginal Benfits/ Cost
the extra or additional benefits/costs caused by consuming / producing one more unit of output
Abnormal Profit
arises when AR > AC (greater than the minimum required by a firm to remain in a line of business)
Normal Profit
The minimum return that must be received by a business in order to stay in business. it is earned when TR = TC or when AR/P = AC
