Micro - Subject specific vocabulary Flashcards
Key definitions and subject vocab for micro
1
Q
Positive statement
A
A statement that can be tested against the facts or
evidence.
2
Q
Normative statement
A
A statement that cannot be refuted just by looking at data or
evidence.
3
Q
Economic activity
A
The production, consumption, exchange and distribution of goods and services.
4
Q
Economic resources (factors of production)
A
The inputs into the production process that are needed to produce the goods and services
that satisfy people’s wants. They are usually classified as land, labour, capital and enterprise.
5
Q
Land
A
The factor of production that includes all the natural resources that are available on the earth.
It includes the land and sea.
6
Q
Capital
A
The human-made factor of production. Examples of capital include machines, tools, lorries
and buildings.
7
Q
Labour
A
The human resource. The contribution made by people to the production of goods and
services
8
Q
Entrepreneur
A
The person who organise the other economic resources to allow goods
and services to be produced.
9
Q
Enterprise
A
Enterprise involves making decisions and taking risks.
10
Q
Scarce resource
A
A factor of production that is limited in supply. There are not enough available to satisfy.
people’s needs and wants.
11
Q
Scarcity
A
The fundamental economic problem that results from limited resources and unlimited wants.
It means that choices have to be made which have an opportunity cost.
12
Q
Opportunity cost
A
The next best alternative foregone when a choice is made.
13
Q
Production possibility diagram
A
Shows the quantities of two goods or services that can be produced with the available
resources, given the current state of technology.
14
Q
Production possibility boundary (PPB)
A
The PPB is also known as the production possibility curve (PPC) and the production possibility
frontier (PPF). It shows the various quantities of two goods or services that can be produced,
with the current state of technology, when all the available resources are fully employed.
15
Q
Resource allocation
A
How the available factors of production are used to produce different goods and services. The
allocation of resources involves determining what is produced, how it is produced and for
whom it is produced.
16
Q
Rational economic decision making
A
Using all the available information to select the best option to maximise the welfare of the
decision maker. A rational consumer chooses to buy the goods and services that, given their
limited income, will maximise their total utility.
17
Q
Utility
A
The satisfaction that is derived from consuming a good or service.
18
Q
Marginal utility
A
The change in total utility that results from the consumption of one more, or one fewer, goods
or services.
19
Q
Diminishing marginal utility
A
The proposition that as more of a product is consumed, the additional satisfaction gained
from each extra unit declines.
20
Q
Imperfect information
A
When an economic agent does not have all the information needed to make a rational
decision, or the information is distorted in some way.
21
Q
Asymmetric information
A
A type of imperfect information where one party to an economic transaction has more
information than the other party.
22
Q
Behavioural economics
A
A branch of economics that includes elements of psychology to improve our understanding of
how people’s decision making is influenced by biases and emotional factors.
23
Q
Bounded rationality
A
The idea that human limitations mean that people’s decision making is not completely
rational. Bounded rationality means that when an individual makes a decision, they choose an
option that is satisfactory rather than optimal.
24
Q
Bounded self-control
A
The idea that people do not have sufficient willpower or self-discipline to resist choices that
may be tempting but are not in their self-interest.
25
Rules of thumb
Mental shortcuts, based on experience, that enable individuals to make decisions more
quickly and easily.
26
Anchoring
The idea that when making decisions, people rely too heavily on one particular piece of
information, the anchor. The anchor is often the first piece of information they encounter.
27
Availability bias
When people’s decision making is unduly influenced by recent events or how easily an event
comes to mind.
28
Social norms
Behaviours that are consistent with what is generally considered acceptable by society at the
present time.
29
Choice architecture
The way or framework in which choices are presented to people.
30
Nudge
Something that encourages a particular decision or behaviour without removing freedom of
choice.
31
Default choice
An option that has been pre-selected for an individual but the individual is able to select a
different option if they want to.
32
Restricted choice
Where the number of choices made available to an individual is limited. This type of choice
architecture is often adopted when there is a large number of choices available which makes
it hard for individuals to decide which is the best option.
33
Mandated choice
A form of choice architecture where the individual must make a decision. Mandated choices
are usually required by law.
34
Demand curve - (REMEMBER a curve always shows a relationship)
The relationship between the price and quantity demanded of a good or service, in a given
period of time, when other things that affect demand are held constant.
35
Price elasticity of demand
A measure of the extent to which the quantity demanded of a product changes in response to
a change in the price of the product.
36
Income elasticity of demand
A measure of the extent to which the quantity demanded of a product changes in response to
a change in income.
37
Cross elasticity of demand
A measure of the extent to which the quantity demanded of a product (A) changes in response to
a change in the price of a different product (B).
38
Normal good
A product where there is a positive relationship between income and the quantity demanded
of the product, eg a rise in income leads to a rise in the quantity demanded.
39
Inferior good
A product where there is an inverse relationship between income and the quantity demanded
of the product, eg a rise in income leads to a fall in the quantity demanded.
40
Supply curve - (REMEMBER curves always show a relationship)
The relationship between the price and quantity supplied of a good or service, in a given
period of time, when other things that affect supply are held constant.
41
Price elasticity of supply
A measure of the extent to which the quantity supplied of a product changes in response to a
change in the price of the product.
42
Equilibrium market price
The price at which the quantity demanded equals the quantity supplied and there is no
tendency for the price to change.
43
Disequilibrium price
A price at which there is either excess demand, and a tendency for the price to rise, or there is
excess supply, and a tendency for the price to fall.
44
Excess demand
The amount by which the quantity demanded exceeds the quantity supplied at the current
price.
45
Excess supply
The amount by which the quantity supplied exceeds the quantity demanded at the current
price.
46
Joint demand
When two products are demanded together so that the demand for one product is directly
related to the demand for the other product. Complementary goods such as printers and
printer cartridges are in joint demand.
47
Competitive demand
When the demand for one product increases the demand for another product decreases.
Substitute goods such as butter and margarine are in competitive demand.
48
Composite demand
When a product has more than one use so that an increase in the demand for one use leads
to a fall in the supply of the product that is available to use elsewhere. For example, milk is
used to produce cream and cheese.
49
Derived demand
When the demand for a product, or factor of production, is determined by the demand for a
different product. For example, the demand for steel is derived from the demand for cars,
and a number of other products.
50
Joint supply
When the output of one product also results in the output of a different product. For example,
sheep farming can lead to the supply of both meat and wool.
51
Production
The process of using factors of production to create goods and services.
52
Productivity
A measure of how much a factor of production can produce in a given period of time. For
example, the productivity of land might be measured by output per hectare per year. It is a
measure of efficiency.
53
Labour productivity
A measure of how much a worker can produce in a given period of time. For example, output
per person per hour.
54
Specialisation
Where firms, regions, countries or factors of production concentrate on producing a
particular good or service, or carrying out a particular task.
55
Division of labour
When the production of a good is broken down into many separate tasks and each worker
performs one task, or a narrow range of tasks, as part of the production process.
56
Short run
The time period when there is at least one fixed factor of production.
57
Long run
The time period when all factors of production are variable.
58
The law of diminishing returns
The law states that as more of a variable factor of production is used in combination with a
fixed factor of production, both the marginal and average returns to the variable factor of
production will initially increase but will eventually decrease.
59
Returns
The amount produced, ie the output of a good or service.
60
Marginal returns
The change in total output that results from employing one more unit of a variable factor of
production when the amount employed of all other factors of production is unchanged.
61
Average returns
Average returns to a variable factor of production is calculated by dividing total output by the
number of units of the variable factor that are employed.
62
Total returns
Total output.
63
Returns to scale
The effect on total output when all factors of production are changed. It relates to the long
run when all factors of production are variable.
64
Increasing returns to scale
When a given percentage increase in all factor inputs leads to a greater percentage increase in
output.
65
Constant returns to scale
When a given percentage increase in all factor inputs leads to the same percentage increase
in output.
66
Decreasing returns to scale
When a given percentage increase in all factor inputs leads to a smaller percentage increase
in output.
67
Fixed costs
Costs that do not change when output changes.
68
Variable costs
Costs that change when output changes.
69
Marginal cost
The change in total cost when one more or one fewer unit of output is produced.
70
Average cost
Total cost divided by output.
71
Total cost
Total fixed cost plus total variable cost.
72
Internal economies of scale
When the growth of a firm results in the firm’s long-run average cost falling.
73
External economies of scale
When the growth of an industry leads to lower average cost for firms in that industry.
74
Diseconomies of scale
When the growth of a firm results in the firm’s long-run average cost increasing.
75
Long-run average cost curve (LRAC)
Shows the minimum average costs of producing any given level of output when all factors of
production are variable but technology has not changed.
76
Minimum efficient scale of production (MES)
The lowest level of output at which a firm’s long-run average cost is minimised.
77
Total revenue
The total amount of money a firm receives from selling its output. It is usually calculated by
multiplying the price of the product by the quantity sold.
TR = P x Q
78
Marginal revenue
The change in total revenue when one more or one fewer unit of output is sold.
79
Average revenue
Total revenue divided by the quantity sold.
TR ÷ Q
80
Profit
The difference between a firm’s total revenue and total cost (TR – TC). The firm makes a profit
when TR > TC. It is the reward for the factor of production enterprise.
81
Normal profit
The minimum amount of profit that is required to keep the firms in the
market in the long run.
It is the opportunity cost of the entrepreneur.
If the cost of enterprise is included as
one of the firm’s costs of production, normal profit is earned when total revenue equals total
cost.
TR = TC
82
Abnormal profit (supernormal profit)
When total profit is greater than normal profit.
83
Subnormal profit
When total profit is less than normal profit and firms cannot stay in the market in the long-run
84
Technological change
The discovery and use of new and improved methods of producing goods and services.
This improved efficiency shifts the LRAC downwards
85
Invention
The discovery of something new. It might, for example, be a new product, process or method
of production.
86
Innovation
The process of introducing and developing a new product, service or method of production.
87
Market structure
The classification of an industry, or market, based on its key characteristics including:
the number of firms, the nature of the product and ease of entry.
88
Divorce of ownership from control
When the people who own a business are not the same set of people who manage, or control,
the business.
89
Satisficing
A decision-making strategy where people/managers aim to achieve an acceptable, or
satisfactory, outcome rather than the optimal outcome.
For example, managers might aim to
achieve a minimum target level of profit rather than to maximise profit.
90
Market share
The percentage of total sales in a given market that is accounted for by a particular firm or
product.
91
Perfect competition (characteristics)
1. large number of small firms
2. selling a homogeneous
(identical) product
3. large number of buyers,
4. Freedom of entry into the market (no barriers to entry)
5. Perfect information
92
Homogeneous products
Products that are identical to each other, they are perfect substitutes.
93
Price taker
A firm that is unable to influence the price of the product it sells. When a firm is a price taker,
the price is usually determined by market forces, ie the interaction of demand and supply.
(e.g perfect competition)
94
Monopolistic competition (characteristics)
1. large number of small firms
2. selling differentiated
products
3. large number of buyers
4. no barriers of entry
95
Differentiated products
Products that are similar but not identical to each other. They are close but not perfect
substitutes.
Products can, for example, be differentiated by the use of brand names,
advertising, design, colour and after-sales service.
These are types of non price competition
that firms use to differentiate their products and increase their monopoly power. (e.g online banking features)
96
Price maker
A firm that is able to set the price of the product it sells. (e.g oligopoly/monopoly)
97
Oligopoly (characteristics)
Oligopoly is a market structure that is often defined as ‘competition amongst the few’. It is not
a clearly defined market structure, but
1. a few large firms dominate the market and compete
(may also contain some small and medium-sized firms)
2. usually produce differentiated products
3. there are barriers to entry (though they can be varied)
98
Concentration ratio
A measure of the combined market share of the largest firms in an industry, usually
expressed as a percentage.
For example, a three-firm concentration ratio could be calculated
as follows: combined sales of the three largest firms ÷ total sales in the market x 100.
99
Collusion
Where rival firms work together for their mutual benefit often to the detriment of consumers.
100
Collusive oligopoly
Where some or all of the large firms in the market work together to increase their monopoly
power.
101
Competitive (non-collusive) oligopoly
Where the firms in the market act individually in their self-interest and use various means to
compete with each other.
102
Kinked demand curve model
Oligopolistic model that assumes that if one firm reduces its price others will
follow, but if a firm raises its price other firms will not raise their prices.
The model attempts
to explain why prices are relatively stable and non-price competition usually prevails in
oligopolistic markets.
103
Cartel
A formal agreement between firms to protect their mutual interest and increase their
monopoly power. The agreement may involve, for example, fixing prices, restricting output
and dividing the market between the firms.
104
Price leadership
Where one firm changes its price and then other firms in the market follow, making similar
price changes.
105
Price agreements
Where firms cooperate to decide and then fix the prices they will charge for different products
and to different consumers.
106
Price wars
Where firms cut prices aggressively to increase their market share and force other firms out
of business. A price cut by one firm, trying to increase its market share, may persuade other
firms to cut their prices and start a price war.
107
Barriers to entry
Factors that make it difficult for new firms to join a market.
108
Monopoly (pure)
Pure monopoly is where a single firm supplies 100% of a market.
109
Monopoly power
The ability of a firm to affect the price of a product. Firms with monopoly power are price
makers and not price takers.
110
Price discrimination
When a firm charges different prices to different consumers for the same product for reasons
other than differences in cost.
111
Creative destruction
The replacement of existing products, markets and firms with new ones as an inevitable
consequence of technological change.
112
Contestable market
A market in which there are few, if any, barriers to entry or exit, or sunk costs.
113
Sunk cost
Costs that have been incurred but cannot be recovered if a firm leaves a market. Sunk costs
create a barrier to firms leaving an industry.
114
Hit-and-run competition
When a firm enters a market to take advantage of the abnormal profits being earned by
existing firms (incumbents) and leaves the market when the abnormal profits have been
competed away.
This is most common in a monopolistic competition market (as abnormal profits are only made in the Short Run)
115
Static efficiency
The most efficient allocation of existing resources at a point in time. Static efficiency requires
both productive and allocative efficiency.
116
Dynamic efficiency
The ability of firms and/or an economy to adapt and improve over a period of time. Dynamic
efficiency depends on investment, innovation and improved methods of production. It is
related to the introduction of new and improved products as well as increases in productivity
117
Productive efficiency
Where it is not possible to produce more of one good or service without producing less of
another good or service. All points on a production possibility boundary are productively
efficient. An individual firm is productively efficient when it is producing at the lowest point on
its average total cost curve.
118
Allocative efficiency
When an economy is producing the combination of goods and services that best satisfies
people’s preferences.
Whilst all points on a production possibility boundary are productively
efficient there might be only one point on the boundary that is allocatively efficient.
An individual firm is allocatively efficient when it is producing an output at which price equals
marginal cost. (P=MC)
119
Consumer surplus
The difference between the price a consumer has to pay for a product (usually the market
price) and the price the consumer would be willing to pay for a product
120
Producer surplus
The difference between the price a firm actually receives for a product (usually the market
price) and the price they would be willing and able to supply the product for
121
Deadweight loss
The value of producer and consumer surplus that is lost when resources are not allocated
efficiently, for example, when a market is not in equilibrium
122
Income
The flow of money received by an economic agent over a period of time.
Income can be either
earned (through employment) or unearned.
Unearned income includes interest from savings,
dividends, share ownership and rent from property.
123
Wealth
The value of the stock of assets owned by an economic agent at a point in time
124
Equality and inequality
The extent to which income and wealth are distributed evenly. The degree of
equality/inequality can be measured, for example, using the Gini coefficient
125
Equity
Related to fairness and justice, it is a normative concept. An equal distribution of income and
wealth is not necessarily equitable. What people judge to be equitable will vary
126
The Lorenz curve
A graphical representation of the distribution of income or wealth
127
Gini coefficient
A numerical measure of the degree of inequality in the distribution of income or wealth
128
Absolute poverty
Where an individual does not have enough income to satisfy their basic human needs.
129
Relative poverty
Where an individual does not have enough income to enjoy the standard of living that is
enjoyed by most people in the society in which they live.
Generally, people who have less than 60% of median income are considered to be in relative poverty
130
Rationing function of the price mechanism
When there is excess demand for products and/or factor services, prices rise to reduce
demand. When there is excess supply, prices fall to increase demand. Rationing through the
price mechanism depends on people’s ability to pay and the strength of their preferences
131
Incentive function of the price mechanism
When an increase in price encourages producers, and those providing factor services, to
supply more, and a fall in price leads to a reduction in the supply of products and factor
services.
132
Signalling function of the price mechanism
A change in price conveys information to economic agents about changing market conditions
in a simple, convenient manner, helping producers and consumers make informed decisions
133
Market failure
When markets operating without government intervention result in a misallocation of
resources.
134
Complete market failure
When the market mechanism does not supply a product even though it would satisfy people’s
needs and wants. There is a missing market.
135
Partial market failure
When a market exists and the product is supplied but not at the socially optimal level, too
much or too little is supplied.
136
Public good
A product that is non-rival and non-excludable.
137
Private good
A product that is both rival and excludable.
138
Quasi-public good
A product that has some but not all of the features of a public good, for example, it might be
non-rival but excludable
139
Non-excludable
When no one can be prevented from consuming the product
140
Non-rival
When the consumption of the product by one or more individuals does not reduce the
amount available for others to consume.
141
Free rider
When an individual is able to consume a product without paying for it. For example, the non-excludability characteristic of public goods means that public goods are subject to the free-rider problem.
142
Tragedy of the commons
Where individuals, acting in their self-interest, overuse a shared resource with the result that
it is depleted (used up) and degraded (damaged).
143
Externality
The effects that producing and/or consuming a product have on third parties. When the
private cost does not equal the social cost, or when the private benefit does not equal the
social benefit of production and/or consumption.
144
Negative externality
When the social cost is greater than the private cost of production, or when the private
benefit is greater than the social benefit of consumption.
145
Positive externality
When the social cost of production is less than the private cost, or when the social benefit of
consumption is greater than the private benefit
146
Social cost
The sum of the private cost and the external cost.
147
Social benefit
The sum of the private benefit and the external benefit.
148
Property rights
Conveyed through the ownership of a resource/product, giving the owner the authority to
decide how it is used.
149
150
Merit good
A product that society judges to be especially worthwhile and is likely to be underconsumed
because the benefits are not always fully appreciated.
151
Demerit good
A product that society judges to be undesirable and is likely to be overconsumed because the
costs are not always fully recognised.
152
Immobility of factors of production
When there are barriers that restrict the ability of factors of production to move to a different
location (geographical immobility) or to change the type of employment (occupational
immobility).
153
Competition policy
Measures adopted by a government to control the activities of firms to protect consumers,
make markets more competitive and encourage an efficient use of resources.
It includes the
investigation of large firms, the adoption of measures to prevent the abuse of monopoly
power, reviewing possible mergers, making markets more contestable and outlawing
restrictive practices.
154
Public ownership
When a firm or industry is owned and controlled by the government. Nationalisation results in
the public ownership of firms that were previously in the private sector.
155
Privatisation
The transfer/sale of state-owned enterprises and other assets from the public sector to the
private sector
156
Regulation
Laws and government-imposed rules that limit and control the behaviour of firms and
individuals
157
Deregulation
The removal of rules that restrict the behaviour of firms and individuals, particularly those
that limit competition.
158
Regulatory capture
When organisations regulating industries are excessively sympathetic to the interests of the
firms that they are supposed to be regulating. They make decisions that favour the firms they
are supposed to be controlling rather than acting in the public interest.
159
Pollution permits
Licences that are sold or allocated by a government that allow firms to emit a set amount of
pollution in a given time period. Permits can be sold to other firms. Pollution permit schemes
provide a market-based incentive for firms to reduce pollution
160
Subsidy
A payment to producers to reduce costs and increase supply
161
Price control
A government regulation that sets a maximum or minimum price that can be charged for a
product.
162
Government failure
When government intervention, with the intention of reducing market failure, leads to a
worse allocation of resources than if the government had not intervened. When government
intervention reduces economic welfare.
163
