Microeconomic Definitions Flashcards
Market Economy
Market forces are allowed to guide the allocation within a society
Centrally Planned Economy
The government guides resources allocation within a society
GDP
The value of all final goods and services produced in a country in a year
Opportunity Cost
The value of the next-best alternative forgone
Loss Leader
A product sold at a price below its market cost to stimulate other sales of more profitable goods or services
Market Failure
A situation in which the free market mechanism does not lead to and optimal allocation of resources
Information Failure
A type of market failure where economic agents lack sufficient information to make fully informed decisions
Asymmetric Information
A situation in which some participants in a market have better information about market conditions than others
Adverse Selection
A situation in which a person at risk is more likely to take out insurance
Moral Hazard
A situation in which a person who has taken out insurance is prone to taking more risk
Ceteris Paribus
“All other things being equal” - The effect of one economic variable on another, provided all other variables remain the same
Ex Ante and Ex Post
“Before the event” and “After the event”
Merit Good
A good that brings unanticipated benefits to consumers, such that society believes it will be underconsumed in a free market
Demerit Good
A good that brings less benefit to consumers that they expect, such that too much will be consumed by individuals in a free market
Private Good
A good that, once consumed by one person, cannot be consumed by somebody else - such a good has excludability and is rivalrous
Non-Excludability
A situation in which it is not possible to provide a product to one person without allowing others to consume it as well
Non-Rivalry
A situation in which one person’s consumption of a good does not prevent others from consuming it as well
Non-Rejectability
A situation in which an individual cannot avoid consuming a good
Public Good
A good that is non-exclusive, non-rivalrous, and non-rejectable
Free-Rider Problem
When an individual cannot be excluded from consuming a good, and so has no incentive to pay for its provision
Zero Marginal Cost
The cost of providing the good to an extra consumer is zero
Quasi-Public Good
A good that has some, but not all, the characteristics of public goods
Indirect Tax
A tax levied on expenditure on goods or services
Direct Tax
A tax charged directly to an individual based on a component of income
Polluter Pays Principle
An argument that a firm causing pollution should be charged the full external cost that it inflicts on society
Hypothecation Taxation
Spending tax revenue in the same area in which the revenue was generated
Price Control
A legal maximum or minimum price
Merger
Two or more firms joining to form a new firm
Cartel
An agreement between firms on price and/or output with the intention of maximising their joint profits
Buffer Stock
A scheme intended to stabilise the price of a commodity by buying excess supply in periods when supply is high, and selling when supply is low
Prohibition
An attempt to prevent the consumption of a demerit good by declaring it illegal
Information Provision
Is when the government educates the public to help consumers make better choices
Contracting Out
A situation in which the public sector places activities in the hands of a private firm and pays for the provision
Competitive Tendering
A process by which the public sector calls for private firms to bid for a contract for provision of a good or service
Public-Private Partnership
An arrangement by which a government service or private business venture is funded and operated through a partnership of government and private sector
Private Finance Initiative ( PFI, later PF2 )
A funding arrangement under which the private sector designs, builds, finances and operates an asset and associated services for the public sector in return for an annual payment linked to its performance in delivering the service
Economic Goods
Goods that are scarce
Free Goods
Goods such as the Earth’s atmosphere that are not normally regarded as being scarce
